SingTel – Kim Eng

Revamp and acquisition fail to impress

Downgrade to Sell. SingTel’s organisational restructuring is broad in scope while the acquisition of Amobee is far-reaching in its implications for the future. While we have no arguments with these developments from the longer-term perspective, we expect its already-challenged margins to be squeezed in the short term. No doubt, the telco can afford the US$321m price tag for Amobee but its ability to improve dividends may come under question. We believe SingTel is poised to make even more acquisitions as it embarks on its Digital L!fe strategy. We downgrade the stock to Sell with the target price reduced to $2.80, based on 11x FY Mar13F PER.

Massive restructuring, major acquisition. SingTel has announced an organisational restructuring that cuts across all business segments and geographies, in a clear break from the traditional country-centric model. It also announced that it has staked its claim in the mobile advertising market via a US$321m acquisition of Amobee. Revenue for the worldwide mobile advertising market is estimated by Gartner to double from last year to US$6.8b this year.

Bold, necessary but slow off the mark. We have mixed feelings about SingTel’s restructuring. In our view, it is a bold move as it illustrates how serious the group is in addressing threats to its business, and also necessary as its space has been encroached upon by nontraditional rivals. However, as in any restructuring, operating costs could spike in the short term and further affect margins that are already under pressure. Implementation, too, will be a concern.

Further acquisitions may cap dividend upside. The valuation SingTel is paying for Amobee does not seem out-of-line with acquisitions of similar companies by others. Nevertheless, it is still a big chunk of change. The acquisition cost represents 27% of the group’s cash holdings as at end-3QFY Mar12. While it will probably not affect SingTel’s dividend, it may cap upside beyond the 55-70% payout range and could dash hopes for further capital management.

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