SingTel – CIMB
Another step in asset monetization
Selling ducts and manholes to CityNet
SingTel took another step towards monetising its passive assets of ducts and manholes that are currently being used by OpenNet and its existing copper network. It will sell these assets and seven exchange buildings to CityNet which is the trustee manager of NetLink Trust for S$1.89bn (S$0.12/SingTel share). The assets may fetch a different valuation in 2014 when SingTel is required to sell down its interest to below 25% by Apr 2014, under its agreement with the regulator. We believe SingTel will return the proceeds to shareholders. Maintain UNDERPERFORM, nevertheless, and our SOP-based target price of S$3.19, with de-rating catalysts still expected from rising competition in Australia and cost pressures in Singapore.
SingTel has announced that it will be selling its ducts and manholes used by OpenNet and seven exchange buildings to CityNet, which is the trustee-manager of NetLink Trust for S$1.89bn (Figure 1). The sale consideration will be financed by a loan from SingTel to CityNet and the issue of units of NetLink to SingTel. In addition, SingTel will:
• Pay about S$20m p.a. to use NetLink’s ducts for SingTel’s existing copper lines. This is for 25 years, with an option to renew for another 25 years.
• SingTel expects to pay another S$12m p.a. to lease space in the seven exchange buildings.
• Enter into a duct-and-manhole service agreement relating to OpenNet’s cables situated within NetLinks ducts. SingTel will pay fixed and variable charges comprising 70% of the variable charge that SingTel receives from OpenNet. The fixed charge is estimated at S$5m, S$15m and S$20m for FY12, FY13 and FY14 respectively. With effect from FY3/14, the charge is estimated at S$20m per annum. The agreement is for 25 years with an option to renew for another 25 years.
SingTel will incur additional operational and maintenance costs for NetLink which should not exceed S$20m p.a.
While SingTel is the sole holder of NetLink and retains a 100% economic interest over the business and assets, it will cease control of NetLink as CityNet will have a majority independent board of directors, and SingTel can only appoint up to 30% of the board.
Another step in asset monetisation. This development does not surprise us. It is part of the process whereby SingTel transfers its ducts and manholes to a separate company to comply with the Infocomm Development Authority’s (IDA) effective open access requirements. SingTel must sell down its interest in NetLink to less than 25% by Apr 2014.
What is new, however, is the S$1.89bn (S$0.12/share) valuation SingTel has assigned to the assets. SingTel had not indicated the valuation of these assets before.
These assets may fetch a different valuation in 2014 when SingTel is required to sell down its interest then. By that time, there could be other access seekers apart from SingTel and OpenNet, which could bolster the value of the assets. We believe SingTel is likely to return the proceeds of the selldown to below 25% to shareholders in 2014.
Positive for SingTel. We maintain that SingTel will benefit from the introduction of the next generation broadband network (NGNBN) in two ways: 1) monetisation of its passive assets; and 2) access to the nationwide fibre network that would help it level its playing field with StarHub, especially for access to residential properties.
No impact on earnings. This transaction has no impact on SingTel’s net profit as it is an internal transfer. However, revenue that it receives from the use of the ducts and manholes and all related opex will now be booked at the associate line as it no longer controls the assets.
Valuation and recommendation
We maintain our UNDERPERFORM on SingTel with an unchanged SOP-based target price of S$3.19. De-rating catalysts are still expected from rising competition in Australia, cost pressures in Singapore, and earnings dilution at Bharti from 3G start-up costs at Bharti Africa.