This week has been an interesting one for Singapore Telecommunications (Singtel).
On Aug 24, it released its 1QFY2022 ended June business update, which saw net profit grow by 43.4% y-o-y to $628 million and underlying operating revenue increase by 4.1% y-o-y to $3.6 billion.
A day later, Singtel announced it will be selling 198 million shares or a 3.3% stake in Bharti Airtel to Bharti Telecom for a consideration of $2.25 billion. This sale, which will see an estimated $0.6 billion net gain on divestment for the telco, is part of the group’s capital recycling strategy.
News of the sale, announced before the market opened on Aug 25, sent Singtel shares up 1.9% at the opening to trade at $2.67.
The divestment will not materially change Singtel’s stake in Airtel, given how it will still hold an effective stake of 29.7% in Airtel, worth $22 billion at current prices, equivalent to around half of Singtel’s market cap. This stake comes in two parts: a 10.5% direct stake in Airtel, and a 19.2% indirect stake in Bharti Telecom.
More importantly, the sale of Airtel shares at this price sends out a strong signal that Singtel shares, based on a sum-of-the-parts valuation method, are undervalued and that the stock deserves a second look.
The stake sale comes on the back of several recent capital management initiatives to rebalance and optimise the portfolio of Singtel’s associates. These included increasing its stake in Intouch Holdings, the parent company of Singtel’s regional associate Advanced Info Service (AIS), and a partial divestment of Airtel Africa.
Airtel’s stock price has grown 23.9% in the past 12 months to trade at INR745.10 ($12.98) on Aug 25. Airtel is trading at 8x 12-month EV/ Ebitda versus Singtel’s core business trading at only about 3x EV/Ebitda based on the market value of its regional associates, according to estimates from DBS Group Research analyst Sachin Mittal in his Aug 25 note. The proceeds from the divestment are also equivalent to Singtel’s full-year earnings.
“As long-term strategic investors and partners, the value of our stakes in our regional associates has risen substantially over the years but has not been properly reflected in our share price,” says group CFO Arthur Lang.
“This sale in Airtel will be our first ever and seeks to address this gap by illuminating the sizeable value of our holdings in Airtel.”
Lang says the sale is part of the telco’s capital-management approach to seize monetisation opportunities, increase its return on invested capital and enhance total shareholder returns. He adds that the proceeds are sufficient to meet the telco’s 5G capex requirements and other growth plans lined up for the coming few years. The cash freed up also puts Singtel in a “strong position” to grow its dividends sustainably in line with its dividend policy.
Singtel says Bharti Telecom will continue to be the principal vehicle for holding its controlling stake in Airtel. This means there is the likelihood of more stake sales to come, freeing up more capital which will be good for dividends.
“It is not unreasonable to expect Singtel’s payout ratio to rise to 85%– 90% ratio (4.6%–4.9% yield at the current price) from 80% last year,” adds Mittal, who has kept his “buy” call on the stock, along with an unchanged target price of $3.24.