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Bharti rights should not over-burden Singtel: CGS-CIMB

Samantha Chiew
Samantha Chiew9/24/2021 03:33 PM GMT+08  • 3 min read
Bharti rights should not over-burden Singtel: CGS-CIMB
Bharti rights not expects to over-burden Singtel
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Singtel recently announced that it intends to fully subscribe to its entitlement (14% direct stake) for associate Bharti's 1-for-14 rights issue at INR535 per share for a total consideration of up to INR29.4 billion ($539 million), over up to three years.

Bharti earlier announced that it planned to raise INR210 billion from the exercise, mainly to fund its 5G rollout, enhance network capacity and invest more into growing enterprise.

See: Singtel to fully subscribe to Bharti Airtel rights issue for up to INR29.4 bil

Following this announcement, CGS-CIMB Research is keeping its “add” call on Singtel with an unchanged target price of $2.90.

“This is in line with our expectations. Singtel’s cash outlay on application (25% of total payment) will be $135 million (based on its direct 14% stake), with the remaining $404 million staggered over two more calls within a three-year period. We believe its balance sheet should be able to easily afford it, given its $755 million cash pile at end-FY2021 and potential incoming cash proceeds from Optus’s tower sale (possibly $1.4-1.5 billion),” says analyst Foong Choong Chen.

Assuming the remaining payment of $404 million is split equally over two calls and occurs in FY2023-2024, Foong estimates that the rights subscription will raise Singtel’s net debt/group EBITDA (including finance leases) marginally to 1.93/1.68/1.59 times at end-FY2022/2023/ 2024 (current forecasts: 1.91x/1.65x/1.56x).

Singtel also indirectly holds Bharti via Bharti Telecom, which is a joint venture between Singtel and the Mittal-owned Bharti Group.

In this deal, Bharti Telecom would have to fork out $170 million to subscribe to its share of the rights (36% stake) on application. At its Aug 30 conference call, Bharti said that Bharti Telecom is currently debt-free after its past stake divestments in Bharti.

“This could indicate that Bharti Telecom may fund its subscription via debt, in our view. This will not be consolidated into Singtel’s balance sheet, though Bharti Telecom will incur interest cost and thus partly offset Singtel’s share of Bharti’s future earnings,” says Foong.

Although this deal is expected is have little impact on Singtel’s gearing, investors may be affected as this may lessen chances of special dividends.

“We believe Singtel’s full subscription of its share of the rights is a sensible move, as Bharti’s prospects are improving amid easing mobile competition in India and positive government reform package/relief measures to support the telco industry. On the latter, the definition of adjusted gross revenue (AGR) will not take into account non-telecom revenue in calculating future service taxes, while cash payments on the previous service taxes owed can now be deferred for up to four years, which will help ease the pressure on telcos’ cash flows,” says Foong.

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However, he notes that the funnelling of cash into Bharti’s rights issue may cause the size of Singtel’s potential special dividends (if any) from monetisation.

As at 3.30pm, shares in Singtel are trading 1.2% higher at $2.51 or 19.48 times FY2022 earnings with a dividend yield of 3.85%.

Photo: Bloomberg

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