• Optus plans to acquire the mobile service arm of amaysim, Australia’s largest MVNO, for A$250m cash, and launch its all-digital brand Gomo.
• We see little earnings impact to Optus. However, there may be synergies and this deal removes the risk of amaysim moving to a new wholesale partner.
• Reiterate ADD with unchanged SOP-based target price.

Optus to Acquire Amaysim for A$250m Cash & Launch Gomo

• As part of its plans to disrupt and reinforce its presence in the Australian mobile virtual network operator (MVNO) market, Optus today announced that it will acquire the mobile service business of amaysim (AYS AU), Australia’s largest MVNO with 1.19m subs (as of 20 Oct), for A$250m cash, subject to completion conditions, including amaysim’s shareholder approval and payment adjustments.
• Optus has also launched Gomo, an all-digital brand that SingTel (SGX:Z74) first introduced in Singapore (Mar 2019).

Amaysim Acquisition May Raise SingTel’s Gearing Only Slightly

• The acquisition of amaysim, an MVNO riding on Optus’s network, is not entirely a surprise as market talks have been around for more than 2 years, as reported by Bloomberg on 21 Aug 2018.
• We believe funding for the deal should not be a problem as the consideration sum
  1. is relatively small (vs. Optus’s FY20 capex of A$1.4bn), and
  2. will only slightly raise SingTel Group’s proforma net debt/EBITDA as at end-FY3/20 from 1.99x to 2.03x, based on our estimates.

There May be Synergies & It Removes Risks for Wholesale Business

• We understand that amaysim’s mobile business will be acquired debt-free. Based on its FY20 underlying mobile EBITDA of A$11.4m, the acquisition values amaysim at a historical FY20 EV/EBITDA of 21.9x. While this seems pricey vs. regional peers, it has yet to take into account any potential synergies, which could include the rationalisation of amaysim’s staff, marketing/distribution and IT systems costs.
• Excluding synergies, we estimate the acquisition to be largely earnings-neutral for Optus, assuming the acquisition is fully debt-funded and interest cost is 3% (post-tax).
• Operationally, the acquisition will allow Optus to better engage amaysim’s subs (e.g. via upselling) and more actively participate in the growing MVNO segment, in our view. The acquisition also removes the risk of amaysim potentially shifting to a new wholesale partner once its current agreement with Optus expires by Jun 2022.

Reiterate ADD on SingTel With Unchanged SOP-based TP

• We retain SingTel’s earnings forecasts, as we expect the acquisition to have little earnings impact. Gradual earnings recovery from 4QFY21F and asset monetisation are potential re-rating catalysts for SingTel. Its FY21F EV/OpFCF of 13.7x is at a 13% discount to or 1.1 s.d. below its 12-year mean, with fairly attractive FY21-23F dividend yields of 3.6-7.1% p.a.
• Downside risk: price wars in its operating markets.

Source: CGS-CIMB Research - 2 Nov 2020