Analysts are upbeat on Singapore Telecommunications, following news that Telkomsel, Singtel’s mobile associate in Indonesia, will be merging with a broadband business IndiHome in what is seen to an earning accretive deal.
Telkom, Indonesia’s incumbent telco operator, is the common controlling shareholder of both Telkomsel and IndiHome. The merger will create an entity with a market share of more than 50% in mobile, and around 75% in fixed broadband.
The mobile market, being more mature in Indonesia, has lower growth potential. In contrast, fixed broadband, with a penetration rate of just 14% versus the Asean average of 40%, is seen to have stronger growth ahead. In addition, fixed broadband has an average revenue per user six times that of mobile in Indonesia, says DBS Group Research, citing Analysis Mason.
Under terms of the deal, Singtel’s stake in Telkomsel slightly diluted. Singtel now holds 35% of Telkomsel. With the new shares issued to Telkom to pay for IndiHome, Singtel’s stake in Telkomsel will be reduced to 30.05%.
However, Singtel will then pay $236 million to subscribe for 0.5% in new shares, thereby bringing its stake to 30.1%, says DBS in its April 6 note, where it flags a better return on capital.
“Telkomsel contributed around 29% of Singtel’s underlying earnings in 3QFY23 ended so it really matters to Singtel that earnings from Indonesia do not decline, adds DBS, which is calling the stock a “buy” along with a $3.18 target price.
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The merger will see Telkomsel expanding its business portfolio against a backdrop of growing fixed mobile convergence, especially using 5G backhaul in remote areas. The enlarged entity will also enjoy cross-selling opportunities and cost synergies across sales and marketing, support functions and capex, says DBS.
RHB Bank Singapore, in its April 10 report, says that while Singtel’s stake in Telkomsel will be diluted, it should be seen in the context of access to a larger addressable market.
RHB notes that Singtel is investing only $236 million into this new entity, and thus, the deal will not cast any doubt on Singtel’s dividend paying capacity, estimated to give a yield of 5.8%.
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“Overall, with this deal, we expect Singtel’s Indonesia business to see a mid-single earnings growth vs low-single digit earnings decline without a deal,” adds RHB, which has kept its “buy” call and $3.30 target price.
Similarly, Citigroup’s Arthur Pineda and Luis Hilado, in their April 6 note, flag that with the merger, subscriber stickiness can be increased as they buy both fixed and mobile services.
“Moreover, they said the merger could generate potential cost and capex synergies given redundant cost items and investments between the two entities,” they add.
Even with the reduced stake in Telkomsel, Singtel expects the transaction to be earnings accretive in the near-term even before factoring in any potential synergy savings on opex and capex, the Citigroup analysts say.
CGS-CIMB’s Foong Choong Chen and Sherman Lam Hsien Jin are similarly positive about this deal, as they see Telkomsel benefiting from an additional earnings driver over the longer term. They’ve kept their “add” call and $3 target price on the stock.
In their April 6 note, the CGS-CIMB analysts expect Indonesia’s fibre broadband subscriber growth to be healthy in the next five years as household penetration at end-2022 was still relatively low at 14%.
“We believe this will rise to at least 30-40% before the market starts to mature, based on Indonesia’s income levels and the addressable market,” the analysts add.
“In addition, by being able to offer fixed mobile convergence products, Telkomsel will also benefit from improved churn as a result of multi-service bundling,” note Foong and Lam.
As at 12.30, Singtel shares changed hands at $2.51, up 0.4%.
