SingTel – CIMB
Termination of Optus JV rural broadband rollout
Australian government terminates funding for Opel
SingTel announced that the Australian government has terminated the A$958m funding agreement with Opel for the rollout of a broadband network serving rural parts of Australia. Opel is a 50/50 JV owned by SingTel subsidiary Optus Networks and Elders Telecommunications Networks. According to SingTel, the termination stemmed from the Australian government’s belief that Opel had failed to meet certain, unspecified conditions. Optus and Elders maintain that they have satisfied all the conditions.
SingTel will be taking a A$9m hit to its books for the capex it had incurred to date. This is in addition to the A$7m operating expenses related to the same project.
No material impact, marginally positive for cashflow. This does not have material impact on SingTel’s earnings, given that Optus has an earnings base of over A$500m. We see a mild positive from a cashflow perspective for 2009-2010 as termination of the project could potentially release around A$100m of cashflow over the period. Recall that the project involved an A$917m contribution from Opel to be matched by the government’s A$958m funding. Most of the A$917m contribution from Opel were in network and distribution assets, leaving only A$200m in actual cash outlay. As a 50/50 partnership, Optus was committed to providing A$100m cash to the project.
We had not factored in significant contribution from this project to Optus as we had questioned the profitability of the project. Hence, no change to our estimates.
Valuation and recommendation
Maintain Outperform with unchanged sum-of-the-parts target price of S$4.45. We continue to like SingTel for its liquid exposure to leading regional mobile operators, diversified earnings base and CY08 yield of over 4%.