SingTel – CIMB

Eyeing Cable & Wireless?

Departure from emerging-market assets

Maintain Underperform. Citing bankers, the media has reported that SingTel is considering a bid for Cable & Wireless Worldwide, a global provider of corporate fixed voice and data services. The key surprise is that SingTel appears to be moving away from pursuing mobile assets in developing countries to fixed-line assets in developed markets, probably acknowledging the lack of suitable and sizeable targets. We are positive on this potential acquisition, given C&W’s strong 3-year earnings CAGR of 21% and attractive prospective P/Es of 10x and 8x. Also, SingTel can probably extract cost savings and exploit cross-selling potential between the two companies. C&W will give SingTel a global platform vs. its current regional one. C&W’s shareholding is fragmented, which makes a takeover less challenging, in our view. However, maintain UNDERPERFORM on SingTel with an unchanged SOP-based target price of S$3.09, in view of headwinds faced by its key units. No change to our earnings estimates.

The news

Reuters has reported that SingTel is considering a bid for C&W, citing the British newspaper, Independent. It said SingTel had contacted bankers in Asia and Europe to discuss the idea and is less than 10% of the way through the process. It cited a corporate adviser as saying that SingTel is in the early stages of its pursuit but a takeover attempt is possible.

C&W provides communication networks and services in the UK and globally. Its clients are large multinational companies, governments, carrier customers and resellers. It provides managed voice, data and IP-based services and applications across the UK, Asia Pacific, India, Middle East & Africa, Europe and North America.

Comments

A departure? The key surprise is that SingTel appears to be moving away from pursuing mobile assets in developing countries to fixed-line assets in developed markets. This news, if confirmed, is an acknowledgement of a lack of suitable and sizeable emerging-market telco assets that could make a significant difference to SingTel. With Bharti owning Zain Africa, which is present in large parts of the continent, we believe SingTel may be running out of emerging-market options.

Positive. We are positive on this possible acquisition given C&W’s attractive growth and valuations, and potential synergies. C&W boasts a 3-year earnings CAGR of 21%, based on Bloomberg consensus estimates. It trades at CY10 and CY11 core P/Es of 10x and 8x respectively, implying a PEG of only 0.5x. Consensus forecast for FY10 earnings is about ₤198m (S$410m) or 11% of SingTel’s core net profit.

Synergies. C&W’s operations are similar to SingTel’s IT & Engineering (spearheaded by subsidiaries NCS and SCS), corporate and carriage services. Acquiring C&W would provide SingTel with a global platform vs. its current regional business. We believe there should be cost-savings and cross-selling of services.

Fragmented shareholding and modest valuations. C&W’s shareholding is also fragmented, with the majority of its shares held by portfolio funds, which makes a takeover less challenging, in our view. We believe SingTel can easily fund the acquisition given C&W’s market capitalisation of ₤1.9bn (S$3.9bn or 11% of SingTel’s market cap) and SingTel’s cash of S$1.78bn as at Jun 10, and FCF of S$3bn p.a.

Valuation and recommendation

Maintain UNDERPERFORM on SingTel with an unchanged SOP-based target price of S$3.09, as this potential acquisition does not change our view on SingTel. We believe the stock will be depressed by margin pressure in Singapore, lackluster earnings at Bharti and potentially rising competition in Australia.

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