• US$525m for 15% direct stake
• Dividend guidance unchanged
• FV of S$3.79

Hello GIC

Following Bharti Airtel’s (Airtel) upcoming US$3.5b rights issuance, Singtel has announced that it will be subscribing fully to its rights entitlement for its direct stake of 15% in Airtel, or ~US$525m. Bharti Telecom (BTL), one of Airtel’s major shareholders, will participate in its take-up entitlement, except for ~US$700m which will be renounced to GIC. As a result, Singtel’s effective stake in Airtel will drop from 39.5% to 35.2% assuming full subscription on the public tranche; Singtel has a 48.9% stake in BTL as of FY18.

Management has shared that Airtel’s recapitalisation exercise should be oneoff in nature, while BTL has no intention to raise equity to fund their rights participation. Airtel will also be looking to issue ~US$1b of perpetual bonds, which Singtel will not be participating in.

ARPU Inching Up

Management remains cautiously optimistic of Airtel’s prospects in India, given the significant consolidation, as well as Airtel’s 4% QoQ growth in mobile ARPU after 9 consecutive quarters of decline. On the latest earnings call, Airtel’s management noted that the upward ARPU movement was due to reasons such as its minimum ARPU plan and content packaging efforts.

While the former has resulted in a significant erosion of Airtel’s customer base, the quality of the base is now being reflected through the ARPU increase. Taken together, management believes that underlying customer revenues are seeing early signs of bottoming out.

Fixed Dividend Guidance Unchanged

On a pro forma basis, Singtel’s net debt to EBITDA (including share of associates’ pre-tax profits) will rise from 1.58x to 1.69x, as of Dec’18, which we believe is sufficient for Singtel to keep its investment grade rating. Management has shared that the US$525m contribution can be comfortably funded by a mixture of cash and debt, and there is no push arising from this to divest any of its non-core assets (e.g stakes in Singapore Post and NetLink Trust).

Assuming that no further than US$525m of contribution is required of Singtel, we believe that FY20F should see net debt to EBITDA (including associates) increase from 1.59x to 1.70x. Crucially, there has been no change to management’s dividend guidance of 17.5 S-cents/share for FY19 and FY20.

We note that the rights issue is currently subject to regulatory approval. We maintain our BUY rating and FV of S$3.79 for now.

Source: OCBC Research - 11 Mar 2019