SingTel – Daiwa

The Bharti overhang is back

What has changed?

• Bharti Airtel (Bharti) (BHARTI IN, Rs310.85, 4), an associate company of Singapore Telecom (SingTel), has signed an agreement to acquire Zain Africa.

Impact

• Our telecoms analyst, Ravi, published Bharti Airtel: Deal signed to acquire Zain Africa today. Ravi estimates the acquisition of Zain Africa could lead to a 15% downward revision in Daiwa's FY11 EPS forecast for Bharti. The downward revision in FY11E EPS could be as much as 20% if Bharti were to win the pan-India 3G spectrum bid as well.

• If there were a downward revision of Bharti's FY11 EPS forecast, it would reduce our FY11 net profit forecast for SingTel by 5% to S$3,939m, or a 0.5% YoY decline.

• The deal is perceived negatively by the market, in our view, as we believe the acquisition EV/EBITDA multiple is high at 8.4x, while Zain Africa's recurring earnings was still negative last year.

Valuation

• Bharti's target price of Rs280 is unchanged pending more information on the deal, which we use for our estimated sum-of-the-parts (SOTP) valuation of SingTel (S$3.09/share). Bharti currently accounts for 21% of our estimated SOTP value for SingTel.

Catalysts and action

• We maintain our 3 (Hold) rating and six-month target price of S$3.09 for SingTel pending more information on the Zain Africa deal. Nevertheless, the risk is on the downside, in our view. We prefer MobileOne (M1) (M1 SP, S$2.09, 2) in the Singapore telecoms space, on the back of its high dividend yield and growth potential of broadband business.

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