Analysts from RHB Group Research and CGS-CIMB Research are upbeat on Singapore Telecommunication’s (Singtel) recently announced divestment of a 70% stake in Australia Tower Network (ATN), a subsidiary of Optus, for A$1.9 billion ($1.86 billion).
See: Singtel divests 70% stake in Australia Tower Network for $1.9 bil; to expand data centre business regionally
The RHB Singapore research team kept their “buy” call for Singtel with a higher target price of $3.37, up from $3 previously. “We view positively Singtel’s disposal of a partial stake in ATN, the first value unlocking of infrastructure assets and capital recycling exercise under the strategic reset announced in May,” the team says in an Oct 4 research note.
RHB points out that the deal implies a “generous premium” at EV/EBITDA of 38 times or US$400,000 per tower (around $542,000), significantly higher than recent comparable deals at 10 to 15 times EV/EBITDA or less than US$150,000 per tower.
Optus has entered into a 20-year leaseback agreement with ATN, and for the construction of 565 new 5G sites over the next three years. “Including the new builds, the transaction multiple levels down to 28 times, or 32% implied EBITDA growth. Singtel is confident of raising ATN’s tenancy ratio further via the new builds, and given the densification needs for 5G,” the team explains.
RHB is also sanguine on Singtel’s plans to expand its data centre business regionally, via partnerships with Thailand’s Gulf Energy and Telkom Indonesia. The team believes Singtel could become one of the region’s leading data centre players in three to five years.
“While we view positively the regionalisation of the data centre business, with opportunities for up-selling of cloud and cyber-security solutions across the expanded footprint, we note hyperscalers are also capitalising on the strong growth via parallel builds,” the team adds.
Meanwhile, CGS-CIMB analysts Foong Choong Chen and Sherman Lam also positively view the sale of ATN, noting the "lucrative" valuation struck on the deal. They are similarly positive on the regional expansion of Singtel's data centre business.
However, the pair have kept the $2.90 target price accompanying their “add” rating for Singtel unchanged for now. “We keep our forecasts, given the minimal impact on our FY2023 core EPS from the ATN deal,” they say in an Oct 1 research note.
The analysts point out that the A$1.9 billion proceeds from the ATN sale are at the top-end of the A$1.5 - 2 billion range that had been cited in recent media reports.
They also highlight that the proceeds will allow Singtel to reinvest in its core business and drive new growth engines while preserving operating cashflow for sustainable dividends.
Proceeds from the sale will be used to fund the rollout of 5G and other growth initiatives, including expanding the B2B digital services business in Singapore and Australia through NCS.
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On Singtel’s data centre expansion, Foong and Lam highlight that the company plans to build up to 100 megawatts of data centre capacity in the region, up from Singtel’s existing 70 megawatts in Singapore. “This may involve investments of circa $1 billion, 50% of which can be raised via debt, with the rest possibly manageably funded by equity from Singtel and its partners,” they say.
Shares in Singtel closed up 3 cents or 1.24% higher at $2.46 on Oct 4.