Unlocking Singtel's hidden value

Singtel’s assets include properties, infrastructure and a network of regional mobile associates including India, Indonesia, Thailand and the Philippines. In Australia, there is also fully-owned subsidiary Optus.

When added up, the total value of these various associates comes up to around $50 billion. Yet, Singtel’s market cap is hovering at around $43 billion. This means Singtel’s core Singapore operations and its sprawling Optus business in Australia, which generated ebit of some $249 million in the most recent FY2022 ended March, have been disregarded by the market. “It is like you buy a house and the house comes with a huge diamond that isn’t valued,” says Lang in an interview with The Edge Singapore.

On Aug 25, Singtel announced it was selling a 3.3% stake in its India associate Bharti Airtel (Airtel) for $2.54 billion to Bharti Telecom, Airtel’s “promoter” that also holds a direct stake in Airtel. While Singtel still retains an effective stake of 29.7% worth some $23 billion from 31.4% before the sale, Singtel’s other intention is to enlighten investors. “What we wanted to do through this exercise is to illuminate the value of this whole portfolio of investments that we have made in our associates,” says Lang.

Singtel is not the only listed company in the world which believes its share price is undervalued by the market. Plenty of other conglomerates, especially those with a heavy focus on properties, trade at varying degrees of discounts too.

See also: Singtel denies report it is 'exploring options' over Australia unit

However, Lang points out that Singtel is more transparent. Property companies revalue their assets every half year or so. On the other hand, one just needs to look up the day’s closing prices of the various listed entities, add up the value of Singtel’s stakes and come to a daily market value. The only exception is Telkomsel, which is privately held. “When we looked at it, it’s like, wow, we need to really unlock this,” says Lang, who is aiming for a return on invested capital in the “high single-digits” from 5.4% as at FY2022.

Slicing the pie

The other main objective of the sale is to recycle capital and deploy the funds in new growth areas — a part of Singtel’s ongoing and very active capital management strategy.

See also: Singtel secures $535 mil five-year green loan, its first

Since April 2021, Singtel has announced plans to raise some $6 billion in divestment proceeds. About half will go towards 5G mobile networks. Another $2 billion to $3 billion will go towards funding new growth areas such as its regional data centre business and to further fund the growth of its IT services unit NCS via regional acquisitions and achieve its data centre ambitions. “We can confidently tell the whole world that all our capex needs for the next few years have been taken care of. We don’t have to worry about that,” says Lang.

And the proceeds can help repair Singtel’s dividend track record too. For years, investors have bought into Singtel for its long history of paying out relatively generous dividends. Following the total dividends of 20.5 cents paid out in FY2018, Singtel paid out 17.5 cents and 12.25 cents in FY2019 and FY2020 respectively. This then went down to 7.5 cents in FY2021 before rising to 9.3 cents in FY2022. In that period, Singtel’s share price dropped from the mid-$3 at the end of FY2018 to barely $2 in October 2020. It has risen to close at $2.62 on Sept 28 although this is still a long way from its post-IPO high of $4.53 on April 15, 2015.

Given a choice, no company likes to cut dividends and make its stock less attractive to investors. Unfortunately, there are funding requirements for capex and acquisitions. Unsurprisingly, because of the pandemic, earnings also took a hit. “We cannot have so many people trying to grab from the same cash pool,” says Lang.

However, if Singtel can generate better returns from the investments in new growth areas using proceeds from the divestments, shareholders stand a better chance of receiving a higher dividend payout. The company’s $5 billion in operating cash flow will now go towards lease and interest payments for the 5G spectrum, its maintenance costs and, last but not least, dividends. “Your dividend is really a function of whether we can make it sustainable. This means it has to be paid out of our business operations and not from borrowings,” says Lang.

Singtel’s list of other divestments includes selling a 1.6% stake in Airtel Africa for about $150 million. A big chunk of the $6 billion target will also be satisfied by the company’s Comcentre headquarters. A joint venture between Singtel and Lendlease will pay Singtel $1.63 billion for the land cost and spend $3 billion to redevelop the site by 2028 with Singtel as the anchor tenant.

“The asset line in our balance sheet includes all our fixed assets like our fibre cables, our towers, our office towers, including this building. All that is booked at some historical value, right? But, the market value of our assets is at multiple times more. And this was what we saw,” says Lang.

For example, Singtel’s deal last October to sell 70% of its stake in its 2,312 Australia mobile towers to a pension fund for A$1.9 billion ($1.76 billion) was at an FY21 pro-forma EV/Ebitda transaction multiple of 38x. “So, will there be more? We’ll look at our balance sheet. And if there are any opportunities and if they make sense, we will do it,” says Lang.

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Bharti and associates

Even as Singtel cling on to its associates like family jewels, Lang acknowledges that the various associates have hit bad patches from time to time. In particular, Airtel in India came under severe pressure about three years ago due to tough regulations and a brutal price war ignited by Jio, a relatively newer mobile operator backed by Reliance, one of India’s largest conglomerates. As a result, Singtel was forced to report its first quarterly loss.

When Airtel tried to repair its balance sheet by calling a rights issue in 2019, Singtel did not take up its full allocation of rights shares. Instead, it was Singapore’s sovereign wealth fund GIC that helped pick up the remainder.

Since then, cooler heads in India have prevailed, bringing an end to the price war while tariffs for mobile price plans have recovered. Regulators too are adopting a more “benign” stance, given how the telco industry has proven it can run a viable business. This belief stems from the role telcos play amid the ongoing pandemic, as they continue to fulfil the critical role of providing mobile and broadband connectivity throughout the subcontinent for businesses and consumers alike.

According to Lang, the Indian government has also seen how far connected its neighbour China is, forcing it to raise itself “a few notches” on the digitalisation ladder. “We see tremendous opportunities in the digital space. Enterprises are spending a lot more on digital, whether data centres, IT services, fixed broadband, financial services, digital services — all that has really picked up a lot,” he says.

In the end, Airtel survived the tough patch as the second-largest player and the one with the industry-leading average revenue per user (ARPU). For the most recent FY2022, Airtel reported revenues of US$10.4 billion ($14.91 billion), up from US$9.15 billion recorded in FY2021. Ebitda in the same period was up US$4.2 billion to US$5.2 billion. From the recent low of INR641 ($11.30) last July, Bharti’s share price has since gained around a fifth to trade at INR760.60 on Sept 28. “Things are definitely looking much better,” says Lang.

But why did Singtel sell the 3.3% stake in Airtel back to the controlling Mittal family instead of other investors? Won’t that be a stronger signal if third-party investors are willing to pay market rates for Airtel’s growth potential?

Lang says the sale was a form of rebalancing where Singtel wanted to illuminate Airtel’s value and signal its commitment at the same time. Singtel owns half of Bharti Telecom, whose shareholdings in Airtel remain the same, but gets to keep the proceeds. “We still believe in the company, if not, we will sell the 3.3% into the market.”

Regional recovery

To be sure, the telco recovery story is not India’s alone. Across the region, Singtel’s various associates are all bouncing back up “quite nicely” from the pandemic. People are going back to work, borders are reopening and people are stepping out of their homes for meals and entertainment, which means they are consuming a lot more mobile data. With the resumption of travel, roaming revenue is recovering too. As at 1QFY2023, Singtel’s roaming revenue has reached 46% of pre-Covid levels, versus a mere 13% back in 1QFY2022.

Another trend benefitting regional telcos is consolidation. In Indonesia, four operators have become three, with the merger of Indosat and Hutchison 3 to form Indosat Ooredoo Hutchison. In Malaysia, Celcom Axiata is merging with Digi.com. Similar consolidation exercises are in progress in India and Thailand.

Even with the consolidation, demand for services telcos can provide is up as companies and governments alike are spending more on digitalisation in the post-pandemic world.

However, there are headwinds. Lang acknowledges that inflation rates — now at multi-decade-highs in many economies — are a concern. While telcos do provide essential services, they are not immune to cost pressures such as higher wages and electric bills. “The one that we are watching very closely is the second-order implications of inflation on consumption power, where people will consume less because of weaker purchasing power,” he says.

As Singtel works closely with its various regional associates, slightly different versions of its capital management strategy are being rolled with some of them.

On Aug 11, Globe, Singtel’s 21.42%-owned associate in the Philippines, announced plans to sell 5,709 towers in two sale and leaseback deals to raise total proceeds of some PHP71 billion ($1.73 billion). Globe estimates it could book pre-tax gains of some PHP25.6 billion from these two deals. It is in talks to sell another portfolio of 1,350 towers.

On Aug 2, Singtel’s 35%-owned associate in Indonesia, Telkomsel, sold a portfolio of 6,000 towers to Mitratel. This follows two similar sales of 6,050 and 4,000 towers back in 2020 and 2021 respectively.
Asset recycling initiatives aren’t always profitable though. In a bid to move up the value chain under the previous management team, Singtel made a couple of acquisitions in cyber security and digital marketing. In 2012, it paid US$321 million for digital marketing firm Amobee. It was then fashionable for telcos to be called “dumb pipe operators” and Singtel did not want to be stuck with that label. By acquiring Amobee, Singtel had aspired to gain a toehold in the digital marketing business by serving up content to consumers too.

Unfortunately, that plan did not work out. Last May, Singtel booked an impairment of $589 million on Amobee. On July 26, Singtel announced the sale of Amobee for US$239 million to UK-based advertising firm, Tremor International.

In 2015, Singtel acquired digital security business Trustwave for US$810 million. Similarly, it had to book a US$250 million impairment for Trustwave last May. According to a Bloomberg report in August, Singtel is getting ready to hive off Trustwave for between US$200 million and US$300 million. Some entities, such as Trustwave’s payment card industry compliance business, have already been sold to Sysnet Global Solutions for US$80 million last October. Other parts of Trustwave have been folded into Singtel units such as NCS and Optus.

Underlying growth

As Singtel tweaks its business portfolio and reallocates capital, the company is more eager than ever to tap underlying growth opportunities in the mobile space that is for its associates to lose. After all, they are already among the leading or second-largest mobile operators in their respective markets.

Over the past decade, mobile connectivity is no longer a luxury exclusively for hardcore gamers, but a necessity for ordinary people to earn their livelihoods.

In major cities like Bangkok, New Delhi and Singapore, its residents have eagerly embraced mobile and digital technology for work and play, especially among the young.

In some emerging markets, mobile data is the only way to get online. Gig workers from GoJek bikers to GrabFood delivery men, for one, rely a lot on speedy and reliable mobile connectivity. “These are all the positive tailwinds that contribute to the market’s growth,” says Lang.

Given the value of these associates, has any offer for them been made to Singtel? Lang says he will be doing a disservice to Singtel’s shareholders if the telco does not entertain such offers at all. “We will always look at the opportunity at that point in time, whatever is being offered to us, and compare it to what we call the intrinsic value of the business and think about the strategic value of holding it.”

“At this point, we do think there’s a tremendous amount of strategic value. Which company, which telco or which Singapore business has this kind of footprint that we have in the region?” adds Lang.

He stresses that Singtel is not in a hurry to divest assets, if at all. This is because it holds what it calls liquid assets on its balance sheet, which gives the company plenty of flexibility. “If ever there is a need, we will always look at our drawer for the list of things we can recycle.”

As of now, Singtel’s priority is to make investments to grow the business by managing its capital sensibly. “We are investing for the future. When allocating the capital, it has to return us something, otherwise, our stock price will not be high,” says Lang.

Charts: Singtel

Photo: Albert Chua/ The Edge Singapore

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