SingTel – BT

Be more generous SingTel, you can afford it

LAST week an old rumour resurfaced which said that Singapore Telecommunications (SingTel) is planning to sell 25 per cent of its wholly owned Australian unit Optus. SingTel, as expected, declined comment. That speculation had made its rounds late last year and chief executive Chua Sock Koong then basically responded with a never say never, shedding no light on the issue.

Some analysts though are puzzled by the old chestnut as they cannot see a need for a sale and one even accused journalists of doing the rumour-mongering.

A check with a SingTel source found that the speculation originated in Australia, no surprises there. One commentary Down Under essentially said it would be an opportunistic way for the firm to unlock extra value from Optus.

It cited the rise in the Aussie dollar and Optus’ recent outperformance – which may not last – but which gives SingTel a nice window to cash out. It added that an IPO that could raise as much as A$4 billion (S$5.1 billion) could be used for potential acquisitions.

But SingTel does not need the cash, not for capital expenditure nor acquisitions. The telco would be able to raise money from the debt market cheaply if there is to be a multiple billion dollar purchase, one analyst noted. And the bulk of its capital expenditure is done or provided for.

SingTel, in fact, enjoys solid cash flows from recurrent earnings and dividends from its associates. Free cash flow for the six months ended Sept 30, 2009, was S$1.67 billion. It is expected to get slightly over S$1 billion in dividend contributions for the current financial year.

Rather than journalists, it is probably fee-seeking investment bankers who are dangling the story of an Optus sale to SingTel. The rumours offer two sale routes of either new or vendor shares.

It sounds sexy, especially to shareholders – not the idea of potential acquisitions – but the prospect of money being returned to them.

Said CIMB analyst Kelvin Goh on the listing rumours – ‘We would be positive if SingTel sell down its stake as the funds raised could be distributed as dividends.’

Stock return and dividend

SingTel has seriously underperformed the rest of the stock market of almost 50 per cent. According to Bloomberg, the one-year total return on the stock is 21.66 per cent. The Straits Times Index (STI) is up 68 per cent from a year ago.

The firm did cautiously increase its interim dividend by 11 per cent to 6.2 cents a share, representing a payout ratio of 52 per cent. Last year’s total dividend of 12.5 cents was unchanged from 2008.

Analysts are betting that there will be a higher final dividend, and projecting the full year to be at least 13.5 cents, achievable given the telco’s strong showing so far.

Nomura analyst Sachin Gupta said in a Jan 11 report that its solid momentum at wholly owned businesses should continue in FY10-11, which bodes well for cash flows.

While there are margin concerns for its Singapore business, SingTel will continue to maintain its market lead share in the wireless and broadband segments. As for Optus, the past four quarters have been the best since 2004, with 7-12 per cent year-on-year revenue growth. Its key regional associates, India’s Bharti and Telkomsel in Indonesia, have dominant positions in their respective markets and continue to gain customers despite intensive competition.

SingTel has been firing on all pistons – no doubt about it. No mean feat in a recession year and so last year’s underperformance has been disappointing.

Mr Gupta said the underperformance was across the board for Asia ex-Japan telcos because operational surprise was non-existent. In fact, SingTel was one of the better telcos last year.

For those with a bit of historical perspective, SingTel actually outperformed the benchmark index during the most dire period of the financial crisis. From April 1, 2008, to March 31, 2009, the stock fell 36 per cent against a 44 per cent decline for the STI.

Whichever route SingTel takes to increase dividend as long as it does not harm the value of the company, is what shareholders care most about. Many are retirees and hold on to their stock because they regard it as a safe investment and a bigger fillip once in a while is seen as a bonus.

SingTel does not need to sell a chunk of Optus to return money to shareholders though one cannot rule out parent Temasek’s requirements.

What the overly prudent management could do is widen its purse strings. The current dividend policy is to pay out 45 to 60 per cent of underlying net profit as ordinary dividends. That could be easily raised to say 55-80 per cent with no negative impact on its financials given its stable cash flows and impeccable rating. That would be a nice move to reward its legion of patient shareholders where dividend income is more critical in their retirement years.

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