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DBS and CGS-CIMB see digital bank licence win as 'positive longer-term development' for Singtel

Felicia Tan
Felicia Tan12/7/2020 08:04 PM GMT+08  • 5 min read
DBS and CGS-CIMB see digital bank licence win as 'positive longer-term development' for Singtel
DBS has upped its TP to $2.75 while CGS has maintained its TP at $3.10.
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DBS Group Research and CGS-CIMB Research analysts have maintained their “buy” and “add” calls for Singapore Telecommunications after the telco, together with Grab, secured a digital full bank (DFB) licence from the Monetary Authority of Singapore (MAS) on Dec 4.

Operations are expected to commence by early 2022.

DBS analyst Sachin Mittal sees the licence as the “start of something exciting” in the long-term for the Grab and Singtel-led consortium.

Grab will own 60% of the joint venture (JV) while the remaining 40% will be held by Singtel.

SEE: Singtel, M1, and Starhub granted final 5G network licence from IMDA

The way Mittal sees it, Grab’s advantage is in the customer data that it has acquired through its ride-hailing platform. Singtel, on the other hand, is a Temasek-controlled entity and a trusted telecom player and should be able to build trust among its customers to take bank deposits.

He also expects the consortium to grab a market share of 2% to 4% in five years and achieve profit within the four- to five-year mark.

“Ceteris paribus, MAS expects DFBs to meet the minimum paid-up capital of $1.5 billion and become fully functional by the fifth year of operations. Excluding mortgages, we project a successful DFB to secure 2%-4% market share of the consumer market in Singapore by FY2025F,” he says.

“This is a reasonable assumption as [Korea’s] Kakao Bank achieved 2.5% share within three years of its launch,” he adds.

A successful DFB in Singapore, Mittal says, is likely to be valued at between $1.5 billion to $3.0 billion by FY2025F.

“While some of the more successful digital banks such as Kakao Bank in Korea trade at 3-4x book value (BV), we expect less bullish valuations of 1-2x BV for a successful DFB in Singapore depending on the market share and PBT margins,” he says.

On Singtel, its core business is trading at 90% below the brokerage’s fair value of 46 cents per share.

“The fair value of Singtel’s associates is $2.54 per share, and $2.29 per share after factoring 10% holding company discount. It implies that market is valuing Singtel’s core business in Singapore & Australia at only 5 cents compared to our fair value of 46 cents per share. Asset divestments could unlock the trapped value,” Mittal adds.

He also sees Singtel’s earnings to resume its growth from the stabilisation of core earnings before interest, taxes, depreciation and amortisation (EBITDA) in FY2022F. This is coupled with a sharp rise in its associate Bharti’s share price and divestments of non-core assets, such as Optus’ towers.

On this, Mittal projects dividend per share (DPS) of 10.9 cents/11.5 cents for FY2021F/FY2022F based on a 100%/90% payout ratio.

“If Singtel’s majority shareholder Temasek accepts scrip dividends, Singtel’s net debt-to-EBITDA can improve to 1.8-2.0x in FY22F from 2.4x currently, easing any pressure on its credit rating,” he says.

To this end, Mittal has upped his target price estimate on Singtel to $2.75 from $2.69 previously.

SEE:Limited risk of Singtel cutting dividend: Citi

“Our fair value for the company’s core business is 46 cents per share (previously 48 cents) based on peer multiples. We value its regional associates at $2.29 per share (previously $2.21) after factoring in a 10% holding company discount. We raise our fair value of Bharti to Rs620 ($11.20) per share (previously Rs550).”

CGS-CIMB analysts Foong Choong Chen and Sherman Lam also sees the DFB licence win as a “positive longer-term development” for Singtel.

“This is not a major surprise, as the market has billed the Grab-Singtel consortium as a front-runner,” say the analysts.

“We view this positively for Singtel, as it represents an expansion into a potentially profitable business over the medium- to long-term and a diversification away from its mature telco businesses. The partnership with Grab, which we believe is one of the most innovative companies globally, allows both parties to leverage each other’s sizeable customer bases (i.e. faster go-to-market, lower customer acquisition costs) and digital capabilities, which raises the chance of success, in our view,” they add.

The awarding of the licences also has no major impact on Singtel’s net profit in the next three years, according to Foong and Lam.

“We believe the growth of Grab-Singtel will be progressive as the traditional banks have made inroads into digital banking services in the last few years and will respond to defend their lucrative banking businesses. Strict regulatory compliance could also impede how fast/cost-efficient GSB is able to execute business expansion strategies, compared to other areas where digital services are less regulated,” they note.

Downside risks for the telco are limited too, they add.

“In terms of capital requirements, its share may be a minimum of $600 million in 3-5 years. Assuming annual investment of $200 million per annum over three years, Singtel’s net debt/group EBITDA would only be slightly higher at 1.53x/1.56x/1.55x at end-FY23/24/25F (vs. our current forecast of 1.50x/1.50x/1.48x) and hence, is unlikely to affect its dividend-paying capacity.”

On this, Foong and Lam have maintained their target price at $3.10 as they “await more clarity” on the consortium’s business plans.

Shares in Singtel closed 7 cents higher or 3.0% up at $2.41 on Dec 7.

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