Analysts are keeping their “buy” recommendations on Singapore Telecommunications (Singtel) following the recent announcement of the group divesting a 20% stake in its regional data centre (RDC) business to global investment firm Kohlberg Kravis Roberts & Co (KKR) for $1.1 billion, further unlocking value from its assets as part of its strategic reset announced two years ago.
KKR’s stake in RDC will grow over time based on capital drawdown (Singtel estimates the 20% mark to be hit in 3 years). KKR also has the option to increase its stake to 25% by 2027 at the pre-agreed valuation.
CGS-CIMB Research is keeping its “add” call with an unchanged target price of $2.80.
Analysts Kenneth Tan and Lim Siew Khee says: “While the implied transaction multiples appear higher compared to global data centre operator peers’ 20- 25x trailing EV/EBITDA, we think the deal is fair considering contribution from Singtel’s data centres in Thailand and Indonesia (91 MW) are not consolidated given they are 35%-owned associates, and Singtel’s RDC FY2023-2026 EBITDA growth is likely stronger versus peers given its almost doubling of capacity in Singapore to 120MW by 2025F (currently: 62MW).”
Additionally, the analysts view the transaction positively for its ability to unlock value (Singtel trades at about 9x CY2024 EV/EBITDA), paving the way for further strategic options to monetise its RDC business in the future. “We think this deal could also free up capital for Singtel, potentially resulting in special dividends,” add the analysts.
Meanwhile, Singtel continues to explore new markets for its RDC expansion, including in Malaysia and Vietnam. It said the key considerations are the ability to secure reliable energy source to sustain operations, and interconnection with submarine cables.
UOB Kay Hian too reiterates its “buy” call and $3.15 target price on Singtel, as analysts Chong Lee Len and Llelleythan Tan are positive on the outcome of this deal and the Singtel’s prospects with a new strategic partner.
“This values the business at an enterprise value of $5.5 billion and lofty 31x FY2024 EV/EBITDA multiple. There is minimal near-term earnings impact. With this transaction, Singtel has unlocked $2 billion out of $6 billion of latent value within the group. The cash proceeds would be used for future expansion and may lead to special/higher dividends,” say Chong and Tan.
While Chong and Tan note that the group is indeed raising funds to expand regionally, they are aware the management may look to spin-off list the RDC business, but not in the short- to medium-term yet.
“In our view, KKR’s recent acquisition of CyrusOne in 2021, a much larger and stable global data centre operator, at a comparable near 25x EV/Ebitda multiple underscores the quality of Singtel’s RDC portfolio and growth potential,” say the analysts.
Similarly, RHB Bank Singapore has kept its “buy” call and $3.40 target price following the announcement.
“We view the growth capital by KKR positively to drive the next leg of Singtel’s RDC business with partial value unlocking of the latter’s unique infrastructure assets at a good premium,” say the RHB research team, they also see this equity investment deal one that would help the group defray costs on its aggressive RDC expansion.
Meanwhile, the RHB research team is upbeat on another $4 billion in capital recycling awaiting the group over the next two years, which is expected to bring upside to dividends. “Given the group’s strong balance sheet (over $3 billion cash hoard as at 1QFY2024), debt headroom and excess cash ($2 billion) after the payment of 5G capex and spectrum, we see scope for further additional/special dividends (over and above the ordinary payout of 60-80% of group core earnings),” say the research team.
In an Sept 18 commentary, DBS Group Research likes that this deal values the RDC business at $5.5 billion, some 60% higher than its $3.4 billion valuation. This also validates Singtel’s RDC approach who is working with its associates in Thailand and Indonesia along with renewable power providers in these countries to target mainly hyperscalers and enterprises to some extent.
Meanwhile, DBS is aware that there is a data centre capacity shortage in Singapore due to supply side bottlenecks and Singtel is also working to fulfil spill over demand from Singapore to locations such as Batam.
Following the news, DBS expects the stock price to rise by about 4%-5%, adding some $2 billion to its fair value. “Singtel is trading at an attractive 45% holding company (HoldCo) discount possibly due to a slower recovery at Optus Australia, which is hurt by high inflation in the country, although the recovery is still intact with tariff hikes undertaken in late July 2023,” says DBS, who is also expecting dividends to increase over the next three years.
Shares in Singtel closed 2.5% higher on Sept 19 at $2.47.