• SingTel to pay S$727m in Airtel’s rights issue, funded by internal cash & debt.
• We think SingTel is making the right decision to participate in Airtel’s rights issue as the prospects for the Indian mobile market may improve.
• We estimate the Airtel stake dilution erodes SingTel’s fair value by 1.3%.

Singtel to Fork Out S$727m to Subscribe for Airtel’s Rights Issue

• SingTel (SGX:Z74) announced that it will fully take up its rights entitlement for its direct 15% stake in Bharti Airtel (Airtel).
• The total consideration is Rs37.5bn (S$727m) for 170m new shares at Rs220/share. Its indirect 24.5% stake in Airtel, via Bharti Telecom Ltd (BTL), will be diluted, as Bharti Telecom is only subscribing for 30.1% of its 50.1% share. The balance 20% of Bharti Telecom’s rights entitlement has been renounced to GIC Private Ltd. The rights issue is expected to be completed within 2-3 months.
• Assuming the public portion is fully subscribed, SingTel’s total stake in Airtel will fall from 39.5% to 35.2% post-transaction, which still makes it Airtel’s largest shareholder.
• SingTel said it remains committed to India/Airtel and that the dilution should be seen from the perspective that it has pumped in more than S$2bn into the Bharti group across various entities (including Airtel Africa) over the last 2-3 years.

Rights Subscription to be Funded by Internal Cash and Debt

• SingTel will fund its rights subscription via internal cash and debt. SingTel also confirmed that Bharti Telecom will raise debt for its portion of the rights, without further equity injection from SingTel.
• Based on the proforma net debt/EBITDA of 1.69x (up from 1.58x) at end-2018, SingTel believes it can maintain its strong credit rating. There are no plans for the sale of non-core assets or share placement to fund this transaction.
• SingTel also reiterated its commitment to pay an annual DPS of 17.5 Scts in FY19-20.
• The total proceeds from the rights (US$3.5bn) and a perpetual bond (US$1bn) issuance will be used by Airtel to pare down debt. Coupled with asset divestment and Airtel Africa’s IPO plans, SingTel said Airtel would be able to sufficiently strengthen its balance sheet and may not need to further raise equity funding in the near-term.

Not the Right Time to Reduce Bet on India

• The market may take this news negatively, i.e. SingTel putting more money into a loss-making Bharti and the highly-competitive Indian mobile market. However, after toughing it out in the market over the last few years, we think SingTel is making the right decision to participate in the rights issue and limit the dilution to its Airtel stake.
• The Indian mobile market has consolidated from more than 10 players in 2015 to only four today. The revenue market share is also quite evenly-shared among the Big Three operators (i.e. everyone has reached decent scale), which may support more stable competition going forward. Airtel India’s ARPU and mobile service revenue have also shown stabilisation in the last two quarters.

Maintain ADD on Singtel With Unchanged Target Price of S$3.40

• We estimate the dilution to SingTel’s Airtel stake effectively erodes its fair value by 4.5 Scts per share (-1.3%), after considering the US$3.5bn equity injected into Airtel, SingTel’s own cash outlay and its share of debt to be raised at Bharti Telecom.
• As the impact is minimal, we keep our SOP-based target price at S$3.40.

Source: CGS-CIMB Research - 07 Mar 2019