SingTel – CIMB

Listing Optus?

IPO of vendor or new shares?

Maintain Underperform. Dow Jones has reported that SingTel plans to sell 25% of Optus in an IPO that could raise A$4bn, according to unnamed sources. The report also quotes another source saying that SingTel values Optus at A$14bn. This news does not surprise us as SingTel was earlier rumoured to be planning a listing of Optus. It is unclear if it plans to sell new or vendor shares. We would be positive if
SingTel sells down its stake as the funds raised could be distributed as dividends. But if Optus raises fresh equity, we would view this negatively, as we see little need for more capital. The A$14bn valuation appears steep against our valuation of A$9.3bn. We maintain UNDERPERFORM on SingTel with an unchanged sum-of-the-parts target price of S$3.30. We see potential de-rating catalysts from further negative news
from India, rising content costs in Singapore and a likely escalation of competition in Australia.

The news

Dow Jones has reported that SingTel plans to sell 25% of Optus in an IPO that could raise A$4bn, according to unnamed sources. The report also quoted another source saying that SingTel values Optus at A$14bn. “Although there is no firm timing yet and no banks have been mandated, you could see things rolling as early as the first half of this year.”

Comments

Doing a Hutch? This news does not surprise us. SingTel was earlier rumoured to be planning a listing of Optus. It is unclear if it plans to sell new shares of Optus or vendor shares. We would be positive if SingTel sells down its stake as the funds raised could be dished out as dividends. The A$4bn raised equates to S$0.33/share or 11% of SingTel’s share price. This would be reminiscent of Hutchison Telecom
International Ltd, which spun off its mature units in Hong Kong Macau by way of distribution in specie.

But if Optus raises fresh equity, we would view this negatively. We see little need for more capital by Optus, given the mature market in Australia and Optus’s already strong free cash flow of about A$600m p.a.

Steep valuations. The A$14bn valuation touted appears steep, at 16x and 15x CY10-11 P/Es and 6.1x and 5.9x EV/EBITDA vs. our valuation of A$9.3bn. This is especially so against a backdrop of rising competition from Virgin Hutchison Australia, which is aiming to the second-largest mobile operator.

Nonetheless, SingTel would benefit if this valuation can be achieved. The valuation implies a 5.6% CAGR equity return for SingTel for the last nine years, taking into account its acquisition price of US$9bn (S$15.6bn) in Sep 01, an estimated average A$700m p.a. in dividends to SingTel and the A$14bn (S$18bn) IPO valuation. The returns would be higher if the acquisition is leveraged.

Valuation and recommendation

We maintain our UNDERPERFORM rating on SingTel with an unchanged sum-of-theparts target price of S$3.30, on the back of this news. We see potential de-rating catalysts from further negative news from India, rising content costs in Singapore and a likely escalation of competition in Australia. Switch to M1 (M1 SP, Neutral, TP: S$2.07) for lower-risk, higher-dividend telco exposure in Singapore or Axiata (AXIATA
MK, Outperform, TP: RM3.86) for exposure to regional emerging telco markets.

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