Singapore Telecommunications’ (Singtel) technology services arm NCS has made yet another acquisition in Australia.
The acquisition of digital services firm ARQ Group for A$290 million ($295.4 million) came just over a fortnight after NCS announced the acquisition of The Dialog Group, Australia’s largest privately-owned IT services company, for A$325 million.
Before this, NCS had acquired cloud consultancy Riley that specialises in Google cloud applications and has also taken a majority investment in cloud transformation specialist Eighty20 Solutions.
The latest acquisition brings the total amount committed to more than A$615 million in just 15 months.
Singtel is no stranger to making acquisitions in Australia. Most famously, back in 2001, it launched the A$17 billion takeover of Optus, which is now Singtel’s fully-owned unit contributing around half its total revenue. When the bid was made, it was Singtel’s — and Singapore’s — largest-ever overseas acquisition.
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Headquartered in Melbourne with offices in Sydney and Brisbane, ARQ has deep expertise in cloud, digital, data and analytics solutions, and is described as one of the fastest-growing digital services company in Australia. ARQ is expected to see revenue reach A$118 million by the end of this year, which represents a 38% y-o-y increase, while ebitda is projected to reach A$18.4 million.
The consideration of A$290 million to be paid by NCS represents an EV/Ebitda multiple of 15.7x, which reflects the confidence NCS has in ARQ’s prospects and synergies with the rest of its operations.
NCS has previously been identified as a key driver for Singtel’s strategic reset and this move will help scale up its NCS Next arm in Australia, which now offers end-toend digital transformation value proposition for clients.
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As part of its transformational growth plan, NCS has been increasing its presence in Australia since December 2020 to serve Australian clients through NCS Next, its digital innovation and services arm that supports growing demand of enterprises for digital transformation solutions.
With the latest acquisition that is slated for completion in May, ARQ’s team of 560 staff will increase the total headcount of NCS in Australia to 1,900.
According to Ng Kuo Pin, CEO of NCS, the latest acquisition completes its jigsaw of strategic investments in Australia, a market which he says is critical to the company’s regional expansion.
“Taken together, our four investments to date have given us the necessary scale, capabilities and credibility to compete as a regional digital powerhouse as we help governments and enterprises in Singapore and Australia achieve their digital transformation goals,” says Ng.
In an email interview with The Edge Singapore, Singtel’s group CEO Yuen Kuan Moon notes the investment community is “definitely sitting up and taking notice” of the moves by the Singtel in the past 10 months. Year to date, shares of Singtel are trading 14.16% higher to close at $2.66 on March 30.
“The process has been incessant as we reinvigorate our core business with 5G, drive new digital business in data centres, IT, and digital services and digital banking, and exercise greater financial discipline by reallocating capital through a concerted programme of unlocking value,” he adds.
Yuen explains that at the group level, Singtel has been successful in creating opportunities for growth with all its affiliates, by leveraging on its expertise, assets and footprint.
As the group is quickly but carefully laying out its growth plans, Yuen adds: “We are moving as fast as we can, our staff are feeling a new sense of purpose and urgency and we won’t take our foot off the pedal until the wheel seriously cranks.”
What analysts say
On the whole, analysts are positive on Singtel’s plans to expand its presence in Australia.
Citi Research analysts Arthur Pineda and Luis Hilado have maintained their “buy” call on Singtel with a target price of $3.44. Referring to the recent Australia acquisitions, they believe Singtel has built for itself a stronger footprint in Asia’s fast-growing ICT services segment.
The analysts believe that the deal will not have any material impact on earnings nor affect Singtel’s capacity to sustain dividends. While details of the investment still remain sketchy, Pineda and Hilado believe that the transaction should have broadly neutral immediate impact on Singtel’s earnings. However, earnings should improve if ARQ is able to further scale up its revenues or is NCS is able to better rationalise expenses as it is folded into the group.
Overall, the Citi analysts are upbeat as they see potential positive factors in the horizon for Singtel. These include M&As of mobile telcos in Thailand or Indonesia that could lessen competition, the return of roaming revenues, an increased 5G takeup to boost mobile revenues and potential market appreciation of digital banking assets once they launch this year.
On Singtel’s 5G efforts, Yuen comments: “With the maturing of 5G technology, we’re excited to unlock the benefits of a 5G-enabled reality for consumers and enterprises. Its potential to transform business models and deliver enhanced products and services on a scale like never before will spur Singapore’s digital economy as the country moves into post-Covid recovery.”
As part of Singtel’s strategic reset to focus on 5G, Yuen reiterates that that the group is rolling out relevant services for both consumer and enterprise segments.
Amid enterprises rushing to digitalise and seek tailored 5G solutions, Singtel has unveiled Paragon, the industry’s first all-inone platform for 5G network, edge computing and services “orchestration”. Bill Chang, Singtel’s CEO for group enterprise, says this platform was designed to meet multiple requirements of security, cost effectiveness and resilience.
CGS-CIMB Research too is positive on Singtel as it continues to rate the stock an “add” with a target price of $3.30 while keeping it as its top Singapore telco pick.
Despite the hefty price tag, analysts Foong Choong Chen and Sherman Lam remain confident that Singtel’s capacity to pay dividends will not be affected. This is partly because Singtel is actively carrying out asset recycling initiatives, which opens up new pots of cash.
Singtel recently sold a 1.6% stake in Airtel Africa for $150 million. It is also planning to divest its corporate headquarters Comcentre and redevelop it via a joint venture. The exercise is expected to raise net cash proceeds of at least $1 billion. Earlier, Optus had divested its 70% stake in Australia Tower Network (ATN) for some A$1.9 billion in a sale and leaseback arrangement.
“We strive to optimise the capital we can unlock from existing assets to fund our growth initiatives including 5G and the regional expansion of our data centre business. We will continue to seek out opportunities to crystallise value from our extensive portfolio of assets,” says Yuen.
Meanwhile, DBS Group Research is holding a more cautious stance as it wonders if Singtel has gone into overdrive with the spate of acquisitions.
Although DBS cites Gartner’s research that IT spending in Australia is expected to grow by 6.5% this year, it notes that a lack of IT talent is a common challenge in Australia. “We prefer to see how much success can NCS achieve in Australia with 1,900 workforce before devoting more capital,” says DBS.
Nevertheless, DBS remains positive on Singtel’s asset recycling efforts as active portfolio management could help the group maintain its credit ratings while investing in growth areas and paying out healthy dividends.
As the telco industry across the region continues transform, the worst could be over for local telcos as Singapore reopens its borders and roaming revenues resume.
Speaking to The Edge Singapore, Maybank Securities senior analyst Kelvin Tan says: “We remain positive as the reopening of international borders would promote gradual recovery in roaming revenue.”
Looking ahead, Tan expects Singtel’s key strategic plans to include accelerating Internet of Things (IoT) connection via strategic partnerships, leveraging current infrastructure assets such as data centres, towers and joint ventures, to unlock value and drive secular growth by allowing enterprises and start-ups to incorporate distinctive use cases on their Multi-access Edge Computing (MEC) structures.
Photo: The Edge Singapore/ Albert Chua
