Brokers' take: Analysts positive on Singtel's latest developments; RHB raises target price

RHB, UOB Kay Hian (UOBKH) and CGS-CIMB view Singtel's recent proposed divestment of a 70 per cent stake in Australia Tower Network (ATN), as well as its plans to build a regional data centre business, as beneficial developments to the telco.

In an update on Monday, RHB raised its target price on the index counter to S$3.37 from S$3 previously while reiterating its "buy" call. The new target price incorporates a 12 per cent environmental, social and corporate governance premium based on RHB's overall 3.6 out of 4 ESG score for the stock.

Noting that Singtel will book a S$400 million divestment gain from the proposed sale in Q3 of FY2022, the brokerage now expects full-year core earnings to rebound after four years of decline, with recovery seen in the mobile business.

The telco's proposed disposal of a partial stake in ATN for A$1.9 billion (S$1.87 billion) in cash is the first value unlocking of infrastructure assets and capital-recycling exercise that comes after the strategic reset announcement by the telco in May.

In its report, RHB highlighted that the sale price comes at a "generous premium" at 38 times FY2021 EV/Ebitda (enterprise value/ earnings before interest, tax, depreciation and amortisation), which translates to about US$400,000 per tower.

The brokerage is also positive on Singtel's plans to expand its data centre (DC) business regionally via partnerships in Thailand and Indonesia, as it believes this will transform the telco into one of the region's leading DC players in three to five years.

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It believes the Singapore DC business is potentially valued at S$3 billion to S$4 billion, based on 20-25 times Ebitda.

"While we view positively the regionalisation of the DC business, with opportunities for upselling of cloud and cybersecurity solutions across the expanded footprint, we note hyperscalers are also capitalising on the strong growth via parallel builds," said RHB.

Separately, UOBKH said it's positive on Singtel's monetisation exercise, highlighting that the ATN divestment is in line with the telco's strategy to reallocate capital to drive core business growth and generate sustainable cash flow.

The brokerage has maintained its "buy" call with a target price of S$2.75.

In a Monday report, its analysts noted that ATN's sale price premium reflects a loss of control by Singtel's Australian telco subsidiary Optus, which will retain only a 30 per cent minority stake in ATN.

On the other hand, UOBKH estimates Singtel's upcoming regional data centre to reach a potential S$8 billion valuation within the next five years, as its latest partnerships are estimated to add 100 megawatts of capacity to its DC portfolio in the medium term.

Citing management guidance, its analysts are expecting Singtel's debt to remain well-capped as the group proceeds with its plans to build its data centre.

Singtel remains the top Singapore telco pick for CGS-CIMB, which also views the ATN sale valuation as "lucrative", given that the sale proceeds are at the top-end of the range cited in recent media reports.

In a report last Friday, the brokerage reiterated its "add" call and target price of S$2.90 post the news. Its forecasts for Singtel remain unchanged as it believes the ATN deal has "minimal impact" on FY2023 core earnings per share estimates of less than 1 per cent.

It believes Singtel's DC plans may involve investments of about S$1 billion, half of which may be raised via debt, with the rest possibly "manageably funded" by equity from Singtel and its partners.

"We are positive on the sale of ATN at high valuations and Singtel's move to quickly establish collaborations to capture the strong growth in DC demand in the Thai and Indonesian markets," said CGS-CIMB analysts.

"Singtel's current share price (at S$2.46) implies an FY2022 EV/Ebitda of just 2.4 times for Singtel Singapore and Optus, and FY2022 to FY2024 yields of 3.9-5.9 per cent per annum," they added.

As at the midday trading break on Monday, shares of Singtel were up 1.7 per cent or S$0.04 at S$2.47.