DBS Group Research has kept its "buy" call and $3.18 target price on Singapore Telecommunications Z74 , following news that the telco has "finally" divested its loss-making cybersecurity business Trustwave.
In its Oct 2 announcement, Singtel says it has sold its 98% interest in Trustwave to MC2 Titanium for US$205 million, or $280 million.
The sale of this loss-making business has been on the cards from as far back as 2021, as part of a strategic review the telco made.
Singtel first bought this business back in 2015 for $770 million but failed to gain much headway. In its 2HFY2021, the telco had already booked an impairment of $336 million.
According to Singtel, the divestment is expected to be completed by the fourth quarter and will not have a material impact on its FY2024 ending March 2024.
In its Oct 2 note, DBS points out that ahead of the sale, Singtel had already absorbed the Asia-Pac business of Trustwave into its operations.
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"So the impairment loss could be less than $100 million in our estimates which is an exceptional loss and does not hurt dividends.
"More importantly, this sale will benefit Singtel’s annual profit by $120 -130 million or 4-5% annually," adds DBS, which calls this divestment "quite positive".
Citi Research analysts Arthur Pinado and Luis Hilado have also kept their "buy" call on Singtel, noting that the divestment will be "beneficial" for Singtel as Trustwave had been loss-making since its acquisition. The analysts upgraded the telco to "buy" on Sept 21.
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"As such, removing the company from its books would serve to improve the group’s profit outlook by eliminating its earnings drag," the analysts write. "With this transaction, Singtel would have completed its strategic review and exit from loss-making investments in cybersecurity and digital advertising where it had limited competitive advantages & geographical adjacency."
Following the news, Pinado and Hilado have raised their target price to $2.85 from $2.78. They have also upped their NPAT estimates for FY2024 to FY2025 by 2% to 5%.
"FY2024 recurring earnings enhancement is relatively limited given its pro-rated benefit to account for the timing of the deal closure. The full benefits of loss removal however should be visible by FY2025," say the Citi analysts.
"While we do see room for potential impairment bookings in FY2024, this should have no impact on dividends, with likely booking as an extraordinary item," they add.
Singtel shares changed hands at $2.43 at 1.56 pm, up 0.41%.
