Singtel: Scaling Back On Airtel

Singtel is the second-largest — measured by market capitalization — a company listed on the Singapore Stock Exchange. In its home market, it’s an Internet service provider, provides TV and fixed-line services, and is the leading mobile network operator in Singapore. STEL also has pursued aggressive expansion outside its own market by owning shares of other regional operators, including 100% of Australia’s second-largest telecoms company Optus, and Bharti Airtel . BAT is based in New Delhi, India, trades on the Bombay and National Stock Exchanges of India, and is a global telecoms company, operating in 20 countries across South Asia and Africa.

Bharti Airtel intends to raise $4.5 billion through a $3.5 billion rights issue and US$ 1 billion perpetual bond issue. The use of the generated funds is to reduce BAT’s leverage and to strengthen its balance sheet. STEL will not participate in the perpetual bond issue but will participate in the rights issue which is structured as 19 shares for every existing 67 shares owned at an approximate 30% discount to the market price. This would potentially increase the share base by 28%. STEL has an existing effective interest of 39.5% in BAT via a 15% direct stake and through its 49% stake in Bharti Telecom (BTL) which in turn has an approximate 50% stake in BAT.

STEL has announced that it will subscribe to 170 million new shares paying some US$ 525 million to fully take up its rights entitlement for its direct 15% stake but is renouncing part of its entitlement through its indirect stake. STEL has renounced in favor of GIC Private Limited (GIC), a sovereign wealth fund established by the Government of Singapore, which interestingly owns another sovereign wealth fund, Temasek, which is the majority owner of STEL. So far, around 67% of the total rights issue is accounted for, and a breakdown of the subscribers is shown in Figure 2.

Assuming full subscription, STEL’s effective interest in BAT declines to 35.2%, while remaining the largest effective shareholder in BAT post-allotment. The obvious question to ask in light of this concerns STEL’s commitment to BAT and the markets it serves?

STEL management insists that its commitment remains strong despite the dilution of its stake, after all, some US$ 1.47 billion of investment has flowed from STEL and across BAT’s various entities over the last 2-3 years. Also, STEL has to consider its financial health. It will fund its rights subscription via internal cash and debt, with no planned sales of non-core assets or share placement needed. This will increase the company’s net debt/EBITDA ratio from 1.58 times to 1.69 times for the coming fiscal year which is not enough to damage what is a strong credit rating and has been kept from going in that direction by limiting the amount of the subscription.

There’s also a difficult balance for STEL to strike with investor sentiment. BAT is currently seeing losses, and the Indian mobile market is highly competitive, yet that market has seen consolidation from many players to just four today. BAT commands a good share of overall market revenue and has seen stabilization in average revenue per user recently. The consensus analyst opinion is that now is not the time for STEL to reduce its bet on the Indian telecoms market, but the market may view this differently.

Subscribing fully may have led the market to really question why STEL was throwing money into a currently loss-making venture, but by suffering a dilution, but limiting its extent, STEL is perhaps trying to appease the naysayers, yet retain sizeable exposure to a provider in a market that’s thought to become more stable in terms of competition. Any further losses made by BAT would be shared with STEL by a reduced amount, but equally so would any gains.

Leaving the rights issue somewhat to one side, STEL has announced that it’s maintaining its dividend per share and free cash flow guidance for 2019/20. The dividend is 17.5 cents, a yield of around 6% on the current price per share of S$ 2.97, and STEL can fund this from operating cash flows and dividends from associates. Maintaining the dividend is of key importance since all Singapore telecoms companies are dividend yield stocks.

Key Risks to the Business

• International investments are exposed to foreign exchange fluctuations, particularly the Singapore dollar against the Australian dollar and Indonesian rupiah, and also the Indian rupee.
• New operator entrance, particularly in Singapore and Australia, leading to pricing pressure, reduction in average revenue per user and eroding margins.
• Dividend cuts will not be received well by investors, particularly as competitors are all dividend-paying stocks.
  

Conclusion

STEL has underperformed its index for the year to date, and that poor performance has been due to multiple factors including currency translation and transaction headwinds, and price competition in associated markets. The expectation is that these negative factors will mitigate in the coming fiscal year. STEL remains the pick of the bunch in the Singapore telecoms market as it has the least exposure to the Singapore mobile sector due to its investments in other markets. This diversification will be maintained after the BAT rights issue while reducing exposure there which will help to satisfy investors with a negative outlook for the Indian market.

STEL offers an attractive, maintained dividend and we think there’s a good chance the stock will catch up over the coming 12 months. We think the stock is worth looking into.—Seeking Alpha