Month: May 2008
SingTel – CIMB
Bharti goes safari hunting
Bharti eyes 51% stake in MTN
The Financial Times reported that Bharti (SingTel’s 30.5% associate) has made a bid for control of Johannesburg-listed MTN, a major telco player in 21 countries across Africa and the Middle East. Bharti is said to have tabled an indicative bid of R165/share (MTN’s closing price at May 5 was R150/share) for a 51% stake. This values the 51% stake at US$19bn.
The acquisition will be funded by US$12bn in debt and the balance US$7bn by issuance of equity either to MTN shareholders or to institutions. Financial Times reported that the debt financing has been secured from Goldman Sachs and Standard Chartered. Merrill Lynch and Deutsche Bank are advising MTN, while Bharti is being advised by Standard Chartered. SingTel is being advised by Goldman Sachs.
MTN which has a market cap of US$37.3 bn operates across 21 countries across Africa and Middle East, serving 68m subscribers (Bharti has 62m subscribers). It has a revenue base of US$9.8 bn (almost 50% larger than Bharti) of which 66% comes from its operations in South Africa and Nigeria.
Comments
Positive move. While the initial market reaction to the deal was negative – Bharti’s share price fell 2.9% at market open on concerns of risk of overpaying and overstretching of balance sheet, we believe the deal should eventually prove to be positive for Bharti and ultimately for SingTel based on available information. Key reasons for our view: 1) Bharti evolves into an emerging market telco powerhouse; 2) accretive acquisition at fair valuations; 3) higher debt levels are manageable.
I. Bharti becomes an emerging market telco powerhouse. If the deal is successful, Bharti’s earnings base will potentially swell by 50% to US$2.5bn (2007 pro-forma) which at current trailing PE of 25x, translates into a multinational emerging market telco with a hefty US$61 bn market cap. The MTN acquisition will give Bharti strategic access to a robust portfolio of 21 telco markets in Africa and Middle-East. MTN’s 6 largest markets which contribute 82% to its total revenues enjoy a “top 2” market position (market shares range between 23-52%) in their respective markets. Growth opportunity is attractive. Blended penetration rate of markets
MTN operates in is 33% (ex-South Africa)/51% (including South Africa).
II. Accretive acquisition at fair valuations. At R165/share, MTN is valued at 15x CY09 PE (consensus estimates) and 7x CY/09 EV/EBITDA (consensus estimates). We do not consider these valuations excessive for a controlling stake. The deal is also likely to be accretive, ex-potential synergies. The 51% stake in MTN should increase Bharti’s earnings base by around 50% and this will offset the potential 15% dilution from the share issuance to finance the deal. We believe there are synergies and improvements that Bharti can bring to MTN based on its experience/track record in competing in a competitive but high-growth Indian market.
III. Higher debt levels manageable, not excessive. Bharti and MTN are currently under-leveraged with 2007 net debt/EBITDA ratios of 0.35x and 0.5x respectively. The US$12bn implies a proforma of the enlarged Bharti 2007 net debt/EBITDA of around 2.0x which we believe is manageable. EBITDA for Bharti and MTN are expected to grow by 18-33% respectively over the next two years according to consensus estimates. In addition, capex for Bharti and MTN have historically been internally-funded from free cashflow.
Is SingTel on board? We believe so. As a 30.5% stakeholder in Bharti, SingTel clearly has avenues to block the deal especially given the size of the acquisition. However, we believe that Bharti has obtained SingTel’s blessings before pursuing MTN. The appeal for SingTel would be an expanded footprint into Africa and Middle East via a leading player in the region, i.e. MTN.
SingTel’s top priority likely to be preservation of its 30.5% We expect SingTel to negotiate for a deal structure that will not be dilutive to SingTel’s stake in Bharti, i.e. no equity issuance to MTN shareholders but rather a capital raising exercise from current shareholders to co-fund the deal. Under this scenario, SingTel will be required to contribute US$2 bn (30.5% of US$7bn). SingTel has sufficient flexibility to make the contribution by raising debt. This could potentially raise SingTel’s net debt/EBITDA to around 1.5x (from 1.0x currently), at the low end of guided target range of 1.5-2.0x.
Potential walk-away price of R210/share. In a competitive bidding scenario, we do not rule out the possibility that SingTel may not be opposed to Bharti paying up to R210/share (27% above current offer of R165/share) for MTN where the deal is no longer earnings accretive on an ex-synergy basis. This is on account of SingTel’s position as a strategic investor and may be prepared to give up some near-term gains for attractive long term growth & synergistic opportunities.
Valuation and recommendation
Maintain Outperform with unchanged target price of S$4.45. The deal is a potential catalyst for SingTel’s share price. If the MTN acquisition is successful under current terms, it could add S$0.38/share to SingTel’s valuation assuming trailing PE of 25x on proforma 2007 earnings, net of acquisition debt. However, we caution that deal completion risk is high given that MTN has a fairly fragmented shareholder base (free float of just under 75%). We do not rule out the emergence of competitive bids. MTN’s two largest shareholders only have a combined stake of 26%. The next four largest shareholders are institutional investors with combined stake of 28%. Offer price will be the swing factor in winning acceptance from the four institutional investors. SingTel’s share price has not reacted to the news, hence we do not expect SingTel’s share price to be punished if the deal falls through. We see option value for in SingTel shares in light of this transaction and SingTel’s initial share price reaction.
SingTel – BT
SingTel may get a line to Africa, via Bharti
Telco’s Indian associate values MTN at US$39b, eyes a takeover
Singapore Telecommunications associate Bharti Airtel is eyeing South Africa’s MTN Group – a deal which, if successful, would make it the biggest takeover involving an Indian company.
There is speculation that the takeover which has valued MTN at a reported US$39 billion might see SingTel get involved either as a co-buyer or increasing its stake in Bharti. It is already its biggest shareholder with a 30.5 per cent stake.
Bharti may have to raise debt or sell shares to fund a takeover of MTN, according to reports.
Bharti said in a statement yesterday that it had ‘entered into an exploratory discussion with MTN Group Ltd, South Africa’. It added that discussions are still at an early stage and may or may not lead to any transaction.
Getting into Africa via Bharti would tie in with SingTel’s acquisition strategy; it has been increasingly looking at markets outside Asia. In February, SingTel chief executive Chua Sock Koong said it ‘decided not to proceed in Ghana’, where it had reportedly been keen on a majority stake in Ghana Telecom.
Apart from in South Africa, MTN has a presence in Ghana as well as almost 20 other countries in Africa and the Middle East. It could provide a springboard for investors looking to strike deeper into the African continent.
Meanwhile, Ms Chua, who took over as chief in April 2007, has said that SingTel’s focus remains in the region, where it has significant know-how. It is also learning about new markets in Central Asia, the Middle East and Africa.
She has also said that SingTel is keen on increasing its stakes in its associates under the right terms and conditions.
SingTel spokesman Peter Heng yesterday said ‘no comment’ when asked if the group would get involved with the proposed deal.
The Financial Times said that Bharti has arranged US$12 billion in financing and may seek to buy 51 per cent of MTN, valuing the company at about US$39 billion.
The acquisition would be the biggest by an Indian company, eclipsing Tata Steel Ltd’s US$13 billion takeover of Corus Group Plc last year.
‘SingTel is the largest shareholder in Bharti with a 30.5 per cent stake and consequently has interest in this transaction anyway,’ said Citi analysts Anand Ramachandran and Rhys Summerton in a report yesterday.
‘That said, given the size of any potential acquisition, we see a reasonable probability that SingTel would get directly involved with Bharti as a co-buyer as well,’ they added.
But they also said ‘history indicates markets worry about overpayment and dilution first before looking at synergies and extended growth opportunities’, referring to Tata Steel’s takeover of Corus.
Tata Steel fell 10 per cent in the fourth quarter of 2006 as it had to raise its bid for Corus to fend off a rival takeover offer for the UK-based steelmaker.
According to Citi, MTN’s market cap of US$35 billion is just slightly lower than Bharti’s US$42 billion. MTN had a 68 million wireless subscriber base across Africa and the Middle East in March while Bharti had 62 million subscribers.
MTN posted US$4.2 billion in earnings before interest, tax, depreciation and amortisation (Ebitda) for 2007. Bharti reported Ebitda of US$2.8 billion for its financial year ended March this year.
SingTel closed at $3.86 yesterday, down one cent.
STEng – BT
ST Engg’s Q1 profit up 13%
It posts net earnings of $122.5m on the back of an 8% rise in turnover
SINGAPORE Technologies Engineering (ST Engg) yesterday posted net earnings of $122.5 million for the first quarter ended March 31 – a 13 per cent increase from $108.8 million for the corresponding period last year. This came on the back of an 8 per cent rise in turnover to about $1.32 billion, from $1.22 billion in Q1 2007.
Earnings per share rose 11 per cent to 4.11 cents from 3.69 cents. Return on equity also rose to 7.1 per cent from 6.4 per cent.
‘Operationally, very robust,’ said ST Engg’s president and chief executive Tan Pheng Hock of the performance, pointing out that this was achieved in the face of a weaker US dollar and a lower interest rate environment. In addition, the group had to incur expenses for the Singapore Airshow in the first quarter this year.
The land systems sector saw the highest percentage increase in turnover as it raked in $364 million, a 22 per cent year-on-year jump. Turnover for the aerospace and electronics sectors also rose by 3 per cent to $469 million and 6 per cent to $245 million respectively but for marine, the turnover was flat at $198 million.
With Skybus Airlines filing for bankruptcy in April, ST Engg decided to adjust its order book to remove the Skybus contract. The group’s order book was $9.19 billion as a result. ST Engg expects to deliver about $2.89 billion of its order book for the rest of 2008. The group expects to achieve a modestly higher turnover and profit before tax in H1 2008 as well as FY2008, compared with H1 2007 and FY2007 respectively.
Sector-wise, ST Engg’s outlook for the aerospace and land systems sectors are bright, and it expects their H1 2008 turnover and profit before tax to be higher than that of the year-ago period. For electronics, the first-half results are expected to be comparable with those of H1 2007. And for marine, H1 turnover and pre-tax profit may be lower.
STEng – CIMB
Mid-term earnings visibility impaired
• Below expectations. 1Q08 net profit (+13% yoy) came in 13% below our estimate and 11% below consensus, forming 22% of our FY08 forecast. The gap could be explained by a depreciating US$ and slower-than-expected growth at Electronics. Stripping out forex, pretax profits would have been S$5.5m higher.
• Aerospace hurt the most by weakening US$. The bulk of Aerospace’s revenue is denominated in the US$. Although utilisation at its US operations remained high and not much pricing pressure was felt, the depreciating US$ was a drag on revenue translation. In 1Q07, the average translation rate was S$1.57/US$; this became S$1.42/US$ in 1Q08. Margins dipped to 18% from 20% mainly on lower sales and higher expenses incurred for the Singapore Airshow and the development of new prototype products. We believe 2Q08 will be stronger with more project redeliveries, especially the Fedex 757 PTF and 767BCF for ANA.
• Electronics affected by iDirect and lack of associated income. The weaker performance at iDirect was due to a delay in product launches to 2H08. The disposal of ECS in 4Q07 also reduced associated contributions. Management has guided for a flat 1H08. On the back of this, we are lowering our FY08 turnover forecast by 5% and projecting slower growth for FY09-10.
• Land Systems surprised positively, led by defence contracts. Earnings came in above our expectations due to higher margins achieved for military contracts and stronger weapons and munitions sales, though these were partially offset by lower earnings from its special vehicles division in the US.
• Order book remained strong at S$9.2bn, with about S$4.2bn for recognition in FY08, representing 73% of our forecast. The order-book balance is net of a S$1bn contract loss from SkyBus as the latter filed for bankruptcy recently. Order-win momentum in 1Q08 was still strong with new contracts of about S$1bn.
• Maintain Neutral; target price reduced to S$3.70 from S$4.01. Earnings estimates cut by 1-3% for FY08-10, to reflect slower growth at Electronics. Our target is still based on blended valuations but we discount our P/E by 20% to 16x from 20x and reduced the LTG in DCF to 1% from 2% on the back uncertainty. Given STE’s sensitivity to US$ weakness and a sluggish US economy, its mid-term earnings visibility has been affected. However, dividend yield is attractive at 6%.
STEng – DBS
Aerospace facing headwinds
Story: 1Q08’s net earnings of $122.5m (+13%) were in line, accounting for 22% of our full year forecast. However, EBIT’s growth of 3% was disappointing, net earnings were lifted by investment income, and lower effective tax rate.
Point: Aerospace disappointed, as the effects of a slowdown in US airlines and weak US$ dampened revenue growth (+3%) and EBIT margins (-1% to 14%). PBT would have dipped 5% if not for an investment gain of S$11.5m. Group incurred forex loss of S$4m. The only bright spot was Land Systems, which saw sales rising 22%, driven by a 72% growth in M&W division. Better product mix in M&W led to PBT growth of 34% and PBT margin expansion by 1 ppt in 1Q08. The Marine sector saw a 10% dip in PBT as the frigate contract is near completion and demand for shipbuilding activities reduced in the US. PBT margins declined in the Electronics group as well, from 9.6% in 1Q07 to 8.2% in 1Q08 owing to delay in launch of iDirect’s new product and divestment of ECS. The Electronics segment should rebound in 2H08, though,with the launch of new products in iDirect by end-June.
Relevance: We have revised our FY09 earnings estimates by 5% on the back of lower growth forecasts in the Aerospace sector as the lag effect of US airlines seeking to cut MRO budgets, will be felt from 2H08. Tough operating environment has resulted in the termination of four budget carriers and the merger of Delta and North-West. Margins will be pressured by a weak USD – every 1% drop in the US$ affects PBT by S$1.6m. We have cut our SOTP based target price to S$3.50, and maintain our HOLD recommendation in the absence of any near-term growth catalysts. Stock price should be supported by strong order book of S$9.2b (down from $9.5bn adjusted for the loss of Skybus contract), high ROE of 31.5% and dividend yield of 5.6%.