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Summary

1) Singtel Group’s Key Business Units

2) Historical Revenue and Profit Trends

3) How Cheap is Singtel? EV/EBITDA, P/E and Dividend Yield

4) What we think Singtel is worth

5) Potential Price Catalysts

Appendix 1: How big a catalyst would a Singtel-Grab Digital Bank license be?

Appendix 2: Broker valuation estimates for Singtel’s 35% stake in Telkomsel

The InvestQuest View:

We have no doubt that Singtel is cheap. The value of its associates alone (which we estimate to be S$2.27), is already close to the Group’s current share price of S$2.39. Separately, our conservative valuation estimates point to a fair value of S$2.80, implying 17% potential upside from the current share price.

However, in order for the market to stop discounting Singtel, we believe that divestments in non-core assets (that can help support dividend payouts) and a convincing sequential improvement to Bharti’s financials will be helpful catalysts.

1) Singtel Group’s Key Business Units

Singtel operates three main business units

• Group Consumer

• Group Enterprise

• Group Digital Life

In the below table, we have listed what each of these business unit’s core activities are and the corresponding key Singtel subsidiaries and associates that are involved.

Do note that some of Singtel’s less meaningful associates have not been included in the above picture, namely Thailand’s Intouch Holdings, Netlink Trust, and Singapore Post. Their overall contribution to Singtel Group’s overall valuation is less significant, as you will see in the Group’s valuation breakdown below.

What Drives the Valuation of Singtel Group (Subsidiaries and JVs & Associates)

In the below pie chart, we show the estimated value that is being derived from Singtel Group’s various subsidiaries and joint venture / associate stakes. The intention is to highlight the entities that are most significant to the overall group.

Note that Singtel Company + Optus + Bharti Airtel + Telkomsel together make up close to 80% of the Group’s value.

Source: IQ Estimates, as of 19 November 2020

Many research analysts have pointed out that the value of Singtel’s joint venture & associate stakes is close to Singtel’s current share price. We illustrate this in the chart below, where these stakes are valued at S$2.27 versus Singtel’s share price of S$2.39.

We will run through in more detail how we derived the value of Singtel Group in Section 4.

Source: IQ Estimates, as of 19 November 2020

2) Historical Revenue and Profit Trends

When analyzing Singtel Group’s financials, it is most helpful to think of Singtel Group in 3 parts

• Singtel Company (the SG telco)

• Subsidiaries (e.g. Optus, NCS, Trustwave, Amobee, DataSpark, innov8)

• Joint ventures & Associates (e.g. Airtel, Telkomsel, AIS, Intouch, Globe Telecom, SingPost and Netlink Trust)

What’s the difference between Subsidiaries VS. Joint Ventures/Associates? Subsidiaries are companies that the Group has “significant control” over. They can be 100% or partially owned by the Group (usually more than 50%). Joint ventures & Associates are companies that the Group has a small stake in.

Note: For most of its important subsidiaries, Singtel Group has a 100% stake.

Group Revenues

When you look at Singtel’s income statement, Singtel Group’s “Revenue” line includes the following:

• 100% of Singtel Company’s revenue

• 100% of Subsidiaries’ revenue

• 0% of Joint Ventures/Associates’ revenue

In the chart below, we see that Singtel Group has been experiencing revenue declines of 1% annualized, from Financial Year 2011 to 2020. Note that Singtel’s financial year ends 31 March.

For the latest half-year results (ending 30 Sept 2020), revenues took a hit due to Covid-19, declining 10.2% year-on-year to S$7.4bn.

Source: Singtel Group Annual Reports / Interim Reports

Group “Core Net Profit”

When you look at Singtel Group’s income statement, Singtel Group’s “Net Profit” line is made up of

• 100% of Singtel Company’s net profits

• 100% of Subsidiaries’ net profits

• Proportionate % of Joint Ventures/Associates’ net profits

“Net profits” declined more significantly in recent years (right chart in below image), largely due to significant tax charges imposed on past revenues earned by Bharti Airtel.

Source: Singtel Group Annual Reports / Interim Reports

As we are more interested to see what the recurring profit is like, we should also look at net profits that exclude any one-off gains/losses. We will refer to this figure as “core net profit” (left chart in above image).

We see that “core net profit” has declined by 4.7% annualized, from Financial Year 2011 to 2020 (left chart below). For half-year results ending 30 September 2020, “core net profits” have declined by 36.2% year-on-year, coming in at S$837m.

The decline in core net profits is mainly due to falling profit margins, which has declined to 11.3% as of FY 1H2021 (see chart below). Apart from the tax charges on past revenues, Bharti Airtel has also suffered from aggressive price competition in India. Optus has also been facing headwinds due to price competition and low NBN resale margins in Australia. It doesn’t help that Covid-19 has also resulted in a significant drop in mobile roaming revenues, due to a fall in business and leisure travel.

Source: Singtel Group Annual Reports / Interim Reports

3) How Cheap is Singtel? EV/EBITDA, P/E and Dividend Yield

For telcos, a more commonly used valuation metric is EV/EBITDA rather than P/E. A key reason is to create a fair comparison between different telco companies. EV/EBITDA excludes interest expenses and depreciation costs in its computation, so it provides a level playing field, as different telcos may choose to use varying levels of borrowings or have different assumptions on the depreciable life of its assets. Investopedia has an article on this, if you are keen to read.

EV/EBITDA currently at 9.5x, below historical average of 12.4x

In the chart below, we show the EV/EBITDA multiples for Singtel Group, Starhub and M1 in the past 14 years. We note that Singapore telcos are now trading near their historical troughs.

For Singtel Group specifically, it is currently trading at 9.5x EV/EBITDA, significantly lower than the historical 14-year average of 12.4x.

Source: Bloomberg, retrieved 19 November 2020

Forward Price-to-Earnings at 15.1x, above historical average of 13.8x

The below picture shows the forward P/E of Singtel Group, Starhub and M1, in the past 14 years. Given the steep decline in earnings, Singtel’s forward P/E at 15.1x is actually above its 14-year historical average of 13.8x.

Source: Bloomberg, retrieved 19 November 2020

Dividend yield at 4.5%, in line with historical average

In the below chart, we show the dividend per share distributed by Singtel from FY 2011 to date. Trouble was already brewing since FY 2019, when the dividend payout ratio (as a % of core net profits) spiked to 101%, from the range of 66-80% in prior years. Since then, Singtel has decided that dividend cuts are necessary, particularly during this trying period.

For FY 1H2021, the interim dividend announced came in below expectations at 5.1 S-cents, a 25% decline from the prior year. Management also guided that dividends for the full year will not exceed the Group’s core net profit.

Source: Bloomberg, retrieved 19 November 2020

We have plotted Singtel’s dividend yield in the past 14 years in the chart below. The current dividend yield of 4.5% is in-line with the 14-year historical average, and this already factors in the recent dividend cuts.

Source: Bloomberg, retrieved 19 November 2020

We do have to remember that some investors look at telcos as bond proxies, so we have also plotted Singtel’s dividend yield MINUS Singapore’s 10-year Govt Bond yields below. On this basis, Singtel’s yield spread of 3.5% is relatively attractive, when compared to the historical yield spread of 2.4%.

Source: Bloomberg, retrieved 19 November 2020

4) What we think Singtel is worth

Joint Venture/Associates ALONE = S$2.27 per Singtel share

In the table below, we have listed Singtel Group’s key joint ventures and associate stakes, and their corresponding implied valuations.

We estimate the value of these stakes (which do not yet include Singtel operations and Optus) at S$37.0bn, translating to S$2.27 fair value per Singtel share.

Our methodology is as follows:

• For JV & associate company stakes that are publicly listed (namely Airtel, AIS, Intouch, Globe Telecom, SingPost, Netlink Trust), we used the current market price multiplied by Singtel’s ownership stake. We then used current FX rates to get an SGD-equivalent value.

• For Telkomsel which is an unlisted associate, we have complied a list of valuations made by research analysts and chose the most conservative one by Goldman Sachs (see Appendix 2 for more details)

Source: IQ estimates & Bloomberg, as of 19 November 2020.

Our Fair Value Estimate for Singtel Group = S$2.80 per Singtel Share

In the table below, we add the estimated fair value of Singtel’s JV/Associate stakes to the estimated fair value of Singtel + Optus. Summing them together and deducting off the Group’s net debt would give us a rough estimate of what Singtel Group is worth.

• For Singtel operations & other subsidiaries, we valued it at a 6x EV/EBITADA multiple, in line with the historical trough multiples of Starhub and M1 (see first chart below)

• For Optus operations, we valued it at 4.5x EV/EBITDA multiple, in line with the historical trough multiples of Telstra. (see second chart below)

In summary, we estimate Singtel Group’s fair value at S$45.7bn, translating to S$2.80 per share. Singtel’s closing price (on 19 Nov 2020) of S$2.39 is 15% below our derived fair value, so we do see our upside potential from here.

We have been more conservative in our valuation methodology compared to the average research analyst, as we want to ensure a greater margin of safety. Some key differences in our valuation methodology vs research analysts include:

1. To value Singtel’s listed JV/associates, we have used their current traded market price. Some analysts are using price targets that are generally higher than the current market price.

2. To value Singtel’s unlisted associate Telkomsel, we have used the most conservative (out of 9) analyst valuations.

3. To value Singtel + Optus core operations, we have used historical trough EV/EBITDA multiples of 6x and 4.5x respectively.

As of the time of writing, the median analyst target price for Singtel Group is S$2.85, implying a 19% upside potential from the current share price. Do see below for the full list of analyst ratings and price targets (we show only those that have been updated in November 2020).

Source: Bloomberg and Refinitiv, as of 19 November 2020.

5) Potential Price Catalysts

5A) Divestment of non-core assets

It is quite a widely held view that some of Singtel Group’s assets are not very productive. For example, roughly a quarter of Singtel Group’s value is derived from its stake in Bharti. Yet, excluding one-off gains/losses, Bharti’s profit before tax has been negative since 31 March 2018.

The amount of dividends that Singtel has received from Bharti has also been uninspiring, totaling just S$122m over the past 3 years. This translates to a mere 0.7 cents (per share of Singtel Group)!

This is the reason why we believe that the divestment of unproductive assets would be a key catalyst for Singtel. UBS has summarized this opportunity well, in a research report dated 6 Nov 2020:

“We believe Singtel’s new CEO can unlock significant value by reviewing almost S$20-25bn of assets, which are currently undervalued by shareholders. These assets, which comprise almost c65% of market cap, either contribute limited cash flows currently or could command a higher multiple than the core telco business if traded separately. Assuming Singtel monetizes these (which include the towers, its 32% stake in Bharti Airtel and other subsidiaries such as NCS, Trustwave and Amobee), and uses the proceeds to buy back shares, the EPS and FCFPS could be boosted by more than 50% in the next 1-2 years and 20-40% in the medium-term.“

To Singtel’s credit, we have already been seeing some divestment activity happening recently, i.e. the sale of 6,050 telecom towers by Singtel’s 35% owned associate Telkomsel to Mitratel.

According to Citigroup, if SingTel receives the special dividend from Telkomsel’s tower sales, it would be entitled to ~S$0.3bn of additional cash to be freed up. This transaction is expected to be completed in 1Q2021.

5B) Sequential Improvements expected from Bharti Airtel

While we have been rather harsh on Bharti in the earlier sections, we note that losses have been narrowing in the past quarters (see chart below). Our sense is that analysts have also started to get a lot more optimistic about Bharti’s prospects.

In its most recent quarterly results ending 30 Sep 2020 (2Q2021), Bharti reported a strong beat to analyst estimates. We provide a summary below, alongside management guidance from Bharti that we deem relevant.

• Total revenues: Rs 25,785 crore, +22.0% YoY

• EBITDA: Rs 11,848 crore, +32.6% YoY

• EBITDA margin: 46.0%, +366 bps YoY / 158 bps QoQ

• Mobile average revenue per user (ARPU): Rs 162 vs prior year’s Rs 128

“Despite being a seasonally weak quarter, we delivered a strong performance with revenue growing at 22% YoY. In the mobile segment, we added over 14 Mn 4G customers and grew revenues by 26%. Our focus on building the most aspirational brand in Indian Telecom to win quality customers is delivering results. Our data consumption grew by 58% YoY which reflects strong engagement of customers on our network. This further underscores our DNA of customer obsession and delivering brilliant experiences through a future ready network and innovative digital platforms. Other lines of business also continued with steady growth momentum, with Airtel business growing 7.5% YoY. We stay committed to improving the profitability of the business. Our continued focus on ARPU improvement and cost optimization led to EBITDA margin expansion by over 158 bps in the quarter sequentially”.

Bharti press release: https://assets.airtel.in/teams/simplycms/web/docs/Press_Release_271020.pdf

5C) International roaming picking up from the current trough

The Covid-19 pandemic has decimated international roaming revenues, due to a fall in leisure and business travel. For the half-year ending 30 September 2020, Singtel Group’s mobile service revenue was down 23% year-on-year, declining to S$380m from S$492m a year prior. This is mainly due to lower roaming and prepaid revenues (tourists and business travellers would typically buy prepaid sim cards).

With news of a successful vaccine, we expect mobile service revenues to pick up from here, albeit at a gradual pace.

The InvestQuest View:

We have no doubt that Singtel is cheap. The value of its associates alone (which we estimate to be S$2.27), is already close to the Group’s current share price of S$2.39. Separately, our conservative valuation estimates point to a fair value of S$2.80, implying 17% potential upside from the current share price.

However, in order for the market to stop discounting Singtel, we believe that divestments in non-core assets (that can help support dividend payouts) and a convincing sequential improvement to Bharti’s financials will be helpful catalysts.

Appendix 1: How big a catalyst would the Singtel-Grab Digital Bank license be?

Some might be wondering if a successful bid from the 40% Singtel / 60% Grab joint venture could a potential catalyst. In our view, it would likely be a positive event…but the actual earnings impact would not be that meaningful.

For sure, there are potential synergies in a Singtel-Grab JV. According to research published by Citigroup dated 22 October 2020, Singtel has ~600mn subscribers across the region (of which 4.3m are in Singapore), while Grab has 166m app downloads across the region. This provides the existing reach to scale up fast.

Separately, the JV will have access to important data, spanning customers’ credit histories, travel patterns, personal transport history, online food and e-wallet spending, which can help drive business decisions for the Singtel-Grab digital bank, which may then more effectively roll out services spanning consumer financing, a cross-market mobile e-wallet and targeted insurance sales.

Based on MAS’s requirements, a full-service banking license will require S$1.5bn in capitalization. With its 40% JV stake, Singtel will have to put up S$600mn of capital. Citigroup had pointed out that successful virtual banks such as Russia’s Tinkoff Bank and Brazil’s Banco Inter trade at around 3x – 5x book value.

If the Singtel-Grab JV is assumed to trade at 3x book value, the incremental value created would be ~S$1.2bn. This works up to be approx $0.074 cents to Singtel’s share price, or merely 3% of Singtel's current market cap.

Appendix 2: Broker valuation estimates for Singtel’s 35% stake in Telkomsel

Source: Analyst reports.