DBS Group Research is reiterating its “buy” call on Singtel with a target price of $2.69 following its 35%-owned joint venture company (JVCo), Telkomsel, entering into a sale-and-leaseback agreement with PT Dayamitra Telekomunikasi (Mitratel).
See: Singtel JV company sells telecommunications towers for $950 mil
Under the agreement, Mitratel will acquire from Telkomsel 6,050 telecommunication towers for IDR10.3 trillion ($950 million). Following completion of the acquisition, Mitratel will lease the towers to Telkomsel under a 10-year lease arrangement.
Following this transaction, Telkomsel will focus on its main business as a digital telecommunications company, while Mitratel will be the largest tower company in the country, with over 22,000 towers.
In an Oct 19 report, analyst Sachin Mittal believes that Telkomsel, being a net cash company, can upstream dividends to its shareholders including Singtel.
Upon the conclusion of the tower sale, Singtel will receive about $333 million in pre-tax contributions from Telkomsel, which can help the group meet its dividend obligations for FY2021.
“We project $2 billion to be paid in dividends by Singtel in FY2021 although half of this amount potentially, could be paid in scrip to Singtel’s largest shareholder Temasek. Singtel’s management is expected to confirm FY2021 dividend with the upcoming 2QFY2021 result,” says Mittal.
If Temasek accepts scrip dividends, Singtel’s net debt-to-EBITDA might improve to 1.8-2.0 times in FY2022 from 2.4 times currently, easing any pressure on its credit rating.
The analyst also believes that the stock is currently undervalued as the market values Singtel’s associates at $2.17 per share, which is the same as Singtel’s total share price. This means that the market is currently not assigning any value to Singtel’s core portfolio in Singapore and Australia.
“Our fair value for the core business of Singtel is 48 cents per share based on peer multiples. Our fair value of associates is $2.46 per share without any holding company discount,” says Mittal.
On the outlook, Singatel’s associates’ contribution is expected to grow into FY2021 led by Bharti, leading to further rise in associate value.
Singtel could divest assets to unlocked trapped value. Possibly, it could divest assets worth 35 cents per share, with Optus towers being expected to be first to be sold, followed by its data centre and digital business in two to three years.
As at 1.05pm, shares in Singtel are trading at $2.16 or 1.4 times FY2021 book and 25.6 times earnings, with a dividend yield of 5.6%.
