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Many restructuring options for Singtel to mull over even as it enjoys operational tailwinds

Samantha Chiew
Samantha Chiew4/23/2021 06:30 AM GMT+08  • 9 min read
Many restructuring options for Singtel to mull over even as it enjoys operational tailwinds
Could Singtel be seeing a restructuring soon?
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Singapore’s sovereign fund Temasek Holdings has had a busy past year with several companies under its control having undergone or proposed some form of business restructuring.

Last week, The Edge Singapore looked at the slew of recent restructuring deals involving companies ranging from Sembcorp Industries, Sembcorp Marine, Keppel Corp and CapitaLand as they reorientate and reorganise themselves to face new market conditions. Analysts are even starting to wonder if a merger between SIA Engineering and ST Engineering’s aerospace unit would take place.

Maybank Kim Eng’s Thilan Wickramasinghe is one analyst who expects more restructuring exercises on the horizon, particularly among large-cap companies pursuing asset-light strategies and seeking better valuations. He notes in a March 29 report that there has been a rising pace in restructurings in Singapore due to structural changes caused by the Covid-19 pandemic and valuation dislocations. In the last six months, CapitaLand, Wilmar International, Jardine Matheson Holdings, Keppel and Olam International have undergone some sort of restructuring.

Now, there is growing talk that Singapore Telecommunications (Singtel), which for years was the largest Singapore company by market value, is in the midst of planning similar moves under newly-appointed group CEO Yuen Kuan Moon.

“With a new management team in place, we believe changes in strategy are likely in an effort to revive profitability and price performance. This could be announced as early as May as the new CEO provides guidance. We note other Singapore companies opted for strategic pivots to help drive value effectively & a new senior leadership team provides the opportunity for course adjustments,” says Citigroup.

Signs that Singtel may not remain in its current form first appeared on Dec 31, 2020 when it announced a reorganisation of its business structure although the aim was to position the group to capture new digital growth. The key to this growth is the creation of a new portfolio under its group enterprise division, which is dedicated to driving 5G enterprise business.

This announcement came amid declining consumer revenues due to intense competition in the market and the lack of roaming revenues due to international border closures to contain the pandemic.

Options on the table

Maybank Kim Eng’s Wickramasinghe believes Singtel could potentially split the group into infrastructure and a customer-facing MVNO (mobile virtual network operator) service. “This could allow the infrastructure business to provide network services to the MVNO for a fixed return,” he says.

Separately, the analyst notes that since Singtel’s core operations in Singapore and Australia are currently valued by the market at close to zero, these segments could then be privatised while the listed entity only offers consolidated exposure to its high-growth associates.

According to Citigroup, Singtel can possibly spin off some infrastructure assets such as the entity that holds the mobile networks towers in Australia under its subsidiary there, Optus. By doing so, Singtel can possibly reduce its Net debt/Ebitda by 0.2–0.3 times, allowing for better dividend visibility.

Another angle might come from NCS, Singtel’s subsidiary which provides infocommunications services for the enterprise customers. Under CEO Ng Kuo Pin, who took on the role in February 2019, NCS has been making some expansionary moves recently. These include sewing up tie-ups with regional partners as well as bulking up its technical capabilities. As a former consultant with Accenture, Ng is presumably familiar with how to help companies big and small embark on their digital transformation journey.

Singtel, Citigroup says, may “crystallise” value in “underappreciated” assets such as NCS. Singtel is known to spin off subsidiaries with their own distinct businesses for their own listings, as in the case of SingPost and Netlink NBN Trust.

NCS was previously subsumed under Singtel’s enterprise group. Ng now reports directly to group CEO Yuen, as part of the group’s reorganisation exercise. Carving out and benchmarking NCS versus Indian peers could allow for incremental 1%–5% NAV accretion for Singtel. “These concepts aren’t yet factored in analysts’ estimates,” says Citigroup, which has a target price of $3.44 on the stock.

Bharti’s new structure

On April 14, Singtel’s associate in India Bharti Airtel announced that it will be undergoing a new corporate structure. This new structure will focus on four distinct verticals — digital, India, international and infrastructure — in a bid to sharpen the company’s focus in unlocking value amid the rapidly unfolding digital opportunity in the subcontinent.

The new structure will also see Airtel Digital fold into the listed entity, Bharti Airtel. The latter will now house all the digital assets including Wynk Music, Airtel X stream, Airtel Thanks, Mitra Payments platform, Airtel Ads as well as other existing and future digital products and services. Meanwhile, all of Bharti Airtel’s telecommunications business will go under a newly-created entity Airtel Limited, which will become a wholly-owned subsidiary of the former.

Bharti Telemedia, the 100% arm operating direct-to-home (DTH) services will sit alongside Airtel Limited for the time being until the DTH business is ready to be folded into Airtel Limited to move towards India’s National Digital Communications Policy (NDCP) vision of converged services to customers. Airtel Payments Bank as well as its infrastructure businesses will continue to remain separate entities.

Tough decision

Singtel’s Thai associates might also see some restructuring action. On April 19, Singtel announced that Gulf Energy Development has made a conditional voluntary tender offer for all securities of Intouch Holdings at the price of THB65 per share ($2.76 per share) as well as a tender offer for all securities of Advanced Info Service (AIS). Singtel holds an equity interest of 21% and 40.5% respectively in Intouch and AIS.

Gulf, meanwhile, holds an 18.93% stake in Intouch and if it manages to acquire 50% or more of the total voting rights in Intouch, Gulf will start the tender offer for all securities of AIS at the tender offer price of THB122.86.

In its latest 3QFY2020 ended December 2020 update, post-tax contributions from Singtel’s regional associates were 2.4% higher y-o-y and these two Thai associates were the only ones to report higher earnings contributions of 2.8% and 6.7% y-o-y respectively, while Telkomsel Indonesia, Globe Telecom of the Philippines and Airtel reported declining contributions.

Given that AIS and Intouch are currently the only two of Singtel’s associates that are reporting growth, will Singtel be willing to sell?

In response to Gulf’s offer, Singtel says it is currently reviewing its options, calling its stakes in Intouch and AIS “strategic investments” and believing in the long-term outlook of the investments. Nonetheless, Singtel has ensured that Intouch and AIS shareholders will get “full benefit of the intrinsic value of the business”.

Although Singtel has yet to announce its decision, RHB Group Research notes that Singtel is committed to its investee companies and associates with long-term views on the assets, with its Thailand investments included. The premium on the offer (in this case below the market price for AIS) are also factors to consider.

RHB, which has a “buy” call on Singtel with a target price of $3.10, also notes that the group has previously been increasing its stakes in its associates, meaning the group’s actions will be guided accordingly.

However, this deal could help unlock some value for Singtel as RHB tells The Edge Singapore, “With the international businesses now parked under group finance, there is perhaps greater urgency to look at portfolio realignment, capital allocation and/or value extraction.”

OCBC’s credit research team, on the other hand, believes that it is unlikely that Singtel would be willing to sell at Gulf’s current offer price.

Singtel acquired its stake in Intouch from Temasek in 2016 at THB60.83 per share. Gulf’s offer price of THB65 per share is not significantly above Singtel’s entry price and the recent trading price of THB63.75 on April 21.

"Given that Intouch is strategic, we think Singtel would unlikely be willing to sell around or below fair value,” says OCBC, while continuing to hold Singtel at a Positive Issuer Profile.

Operational tailwinds

To be sure, this will be an active and crucial year for Singtel and its new group CEO. In a short span of just four months, Yuen has led the group towards several new business conquests with 5G technology.

With the help of 5G, Singtel has decided to grab a piece of the electric vehicle (EV) action. Last month, it signed an MOU with Hyundai Motor Company to collaborate on a range of ventures to support smart manufacturing and connectivity for Hyundai’s EV battery subscription service.

Together, Hyundai and Singtel will develop and pilot a 5G-enabled smart factory use case for Hyundai Motor Group Innovation Centre Singapore’s (HMGICS) intelligent manufacturing platform and potentially scale it up for deployment across Hyundai’s manufacturing plants globally. They will also collaborate to create an IoT communications solution for the batteries powering Hyundai’s EVs in Singapore.

In another MOU, Singtel will form a strategic alliance with Surbana Jurong to integrate technology and infrastructure to co-create smart city solutions that will accelerate the transformation of key industries.

The partnership will integrate Singtel’s 5G Multi-access Edge Compute and Surbana Jurong’s P24K suite of facility management systems to create an industry-first 5G-powered data aggregation and management platform that tracks, monitors and manages multiple operations simultaneously. The integrated system will aggregate data about space, water, energy, utilisation and indoor air quality from sensors to help facility managers drive greater operational efficiency and achieve their smart and sustainable goals.

As Singtel assembles these various new pieces to get ready to capture new growth areas, the telco might enjoy a reprieve from the negative market factors that have weighed the industry down over the past couple of years.

“Beyond the strategic changes we see operational tailwinds as likely materialising into FY2022 with the likely revival in roaming driving mobile revenues and the economy which could drive enterprise revenues,” says Citigroup. “Competition in key markets such as Singapore, India and Indonesia could also ease given specific market circumstances.”

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