• Maintain NEUTRAL based on lower SOP-derived Target Price of SGD3.09 from SGD3.22, 5% upside after factoring in the USD525m (SGD711m) subscription to Bharti Airtel’s (BHARTI IN) rights issue announced recently and the dilution in stake post exercise. Refer to attached PDF report for SOP valuation details.
• SingTel (SGX:Z74) trades at 1.5 SD below its historical EV/EBITDA mean which, in our view, reflects the stock’s risk-to-reward profile, with support coming from the sustained 6% dividend yields for FY19F-20F (Mar).
• SingTel remains our preferred Singapore telco exposure given its earnings diversity and dividend certainty.
• Key risks: stronger than expected competition, wider than expected losses for its adjacent (digital) businesses and value dilutive M&A.

Taking Up 15% of Bharti’s USD3.5bn Rights

• SingTel announced that it is subscribing for USD525m (170m new shares) or 15% of Bharti Airtel’s USD3.5bn rights issuance. The cash call is part of the latter’s USD4.5bn re-capitalisation exercise which includes the issue of USD1bn perpetual bonds. The proceeds will be utilised to retire debt and fund capex needs.
• The Government Investment Corporation (GIC) of Singapore will emerge as a new shareholder via the rights subscription of USD700m (20% of the rights) to be renounced from current shareholder, Bharti Telecom (50.1% in Bharti).
• Upon completion, SingTel’s stake in Bharti will be reduced to 35.2% from 39.5% although it remains the largest shareholder.

Renewing the Commitment to the Indian Mobile Market

• SingTel said it remains committed to the longer-term prospects of Bharti and the Indian telco market.
• The latest investment follows the additional USD900m ploughed into Bharti Group over the past 12 months, including USD250m in Airtel Africa. SingTel said the exercise will not impact its dividend commitment (SGD0.175 per share for FY19-20F) with pro-forma net debt/EBITDA rising to 1.69x from 1.58 previously, which still offers balance sheet headroom and within its debt covenant, which it remains committed to.
• The rights price of INR220 per share is at 26% discount to theoretical ex-rights price of INR296 and 30% discount to the closing price of INR318.05 on announcement date. About 67% of issuance (c.USD2.4bn) has been committed for by existing shareholders/promoters (including GIC) which reduces the risk of the exercise falling through, in our view.

Green Shoots Have Emerged

• We note that while Bharti continues to be negatively impacted by the severe price competition in the Indian mobile market over the past two years, sparked by the entry of Reliance Jio (RJIO), green shoots have emerged with the stabilization of mobile service revenue and the 4% q-o-q ARPU uplift in 3QFY19 (Dec quarter). This marks the first ARPU expansion after nine consecutive quarters or erosion, supported by the introduction of minimum recharge plans.
• For 3QFY19, Bharti contributed a pre-tax loss of SGD120m (9MFY19: SGD337m loss) vs pre-tax loss of SGD165m (2QFY19) and pre-tax profit of SGD46m (3QFY18).

Source: RHB Invest Research - 11 Mar 2019