Latest asset divestment to support dividends

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).

Under the agreement, Mitratel will acquire 6,050 telecommunication towers from Telkomsel for INR10.3 trillion ($950 million) and then lease them back for a 10-year term.

In an Oct 19 report, analyst Sachin Mittal believes that Telkomsel, being a net cash company, can upstream dividends to its shareholders including Singtel, which can receive about $333 million in pre-tax contributions and help meet 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 between 1.8-2.0 times in FY2022 from 2.4 times currently, easing any pressure on its credit rating.

The analyst also believes that Singtel is currently undervalued as the market values its 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, Singtel’s associates’ contribution is expected to grow into FY2021 led by Bharti Airtel, leading to further rise in associate value.

Singtel could divest assets to unlocked trapped value. It could divest assets worth 35 cents per share, with Optus Tower being expected to be first to be sold, followed by its data centre and digital business in two to three years.— Sa