SingTel – DMG

Snaps up rival SCS

SingTel announced yesterday that it acquired a 60% stake, or 93.1m shares, of Singapore Computer Systems (SCS) from Green Dot Capital. SingTel will be paying S$139.7m, or S$1.50 per share, for its stake. The purchase will be paid through internal sources. SCS has been one of the best performing counters of late. Its share price has surged close to 40% to S$1.31 since end Jul 08, after Green Dot’s revelation that it was going to review its stake.

Following the acquisition, SCS will become a subsidiary of SingTel’s information and
communications technology (ICT) services arm NCS – one of its fiercest competitor. In the most recent high profile contest – the S$1.3b SOEasy (Standard Operating Environment) contract in Feb 08, NCS lost out to the SCS’ One Meridian consortium. The acquisition would give it access to such contracts, as well as a more entrenched footprint in Southeast Asia (Indonesia, Thailand, Brunei). NCS’ overseas exposure is largely concentrated in Australia, China, Malaysia and the Middle East.

Over the past year, there have been two major M&As in this field – Frontline’s takeover by US-based BT and the privatisation of Datacraft by parent Dimension Data. This validates our earlier call that with valuations so low, many of our better tech companies will see M&A action. Based on the acquisition price of S$1.50, SingTel is pricing SCS at 11x P/E and 1.6x historical P/B. This is cheaper than both the Frontline (19.0x P/E, 2x P/B at takeover price of S$0.245) and Datacraft (16x P/E, 3x P/B at takeover price of US$1.33) deals.

We are maintaining our earnings estimates for SingTel as SCS will unlikely contribute
significantly in the near future. Based on our sum-of-the-parts valuation, we have a price target of S$4.05. Maintain BUY.

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