SingTel – CIMB

Bharti’s expensive growth

Third time lucky

Maintain UNDERPERFORM on SingTel. We believe Bharti’s recent acquisition of Zain Africa is pricey and earnings-dilutive for SingTel. At about 8x CY10 EV/EBITDA, this is a sharp premium to Indonesian telco valuations of 5-6x, the closest proxies in our coverage universe. We estimate that SingTel’s FY11-13 core net profit would be diluted by 0.5-4%. In addition, risks of operating in Africa are higher than in Indonesia. We maintain our sum-of-the-parts target price of S$3.30 for SingTel on the back of anticipated earnings dilution, and the premium valuations paid. Key de-rating catalysts are an upcoming 3G spectrum auction in India, higher content costs in Singapore with the telecasting of Barclays Premier League from Aug 10 and potentially higher competition in Australia, in our assessment.

The news

After failing to clinch controlling stakes in MTN twice, Bharti has finally succeeded in acquiring a large African asset through Zain Africa for US$9bn in cash for the latter’s equity. About US$8.3bn will be paid upon closing and US$0.7bn one year from closing. Bharti Airtel will assume US$1.7bn of consolidated debt. Zain Africa has controlling stakes in mobile operators in 15 African nations (Figure 1). This acquisition will expand Bharti’s presence from the three countries (Bangladesh, India and Sri Lanka) it currently operates in.

Nigeria is the largest contributor. Four countries – Nigeria, Zambia, Gabon and Tanzania − contribute 68% of Zain Africa’s EBITDA with Nigeria being a distant first with 38% contribution.


Expensive. We believe the purchase price is high, at 9.2x annualised CY09 and 8x CY10 EV/EBITDA, assuming Zain’s EBITDA grows by 15% in CY10. This is high relative to the risks and income levels of the countries Zain operates in. Valuations are above those of Indonesian telcos, which are the closest proxies in our universe, valued at 5-6x EV/EBITDA, and taking into account the premium paid for control of the group.

While Zain Africa’s mobile penetration is low, this has to be seen against the income levels in the countries Zain is present in. The average population-weighted penetration rate of the countries it operates in is 35%. While this is substantially lower than Indonesia’s 82% SIM penetration and 46% user penetration, the average population weighted PPP-adjusted GDP per capita where Zain Africa operates in is US$1,500. This is much less than Indonesia’s US$4,149 (according to IMF).

Risks. The risks of investing in Africa include political instability, poverty, potentially higher taxes/levies and more mobile licences being issued. However, the population weighted GDP growth expected for FY10 is a fairly robust 5.8%

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