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A "BUY" call with a target price of S$4.55 has been placed on Singapore Telecommunications (Singtel) following its proposed acquisition of a 21 per cent stake in Thailand's Intouch Holdings and a 7.39 per cent stake in India's Bharti Telecom from Temasek Holdings.
The transactions are valued at S$2.47 billion and will be funded by a placement of new Singtel shares to Temasek, cash and short-term debt. The transactions are subject to minority-shareholder and regulatory approvals, and are expected to be completed by December 2016.
Intouch is the major shareholder in Advanced Info Service (AIS), while Bharti Telecom is the promoter of Airtel.
BNP Paribas said on Thursday the Intouch and Bharti Telecom acquisitions would increase Singtel's effective interest in AIS to 31.8 per cent from 23.3 per cent and in Airtel to 36.3 per cent from 32.9 per cent.
"We have a positive view on AIS as we believe its fundamentals are strengthened after its spectrum acquisitions and 4G launch. While there are uncertainties around AIS's dividend policy beyond 2016, Singtel's latest move may be viewed as a sign of its confidence in AIS's dividend outlook. We are positive on Airtel given its spectrum and network leadership, and exposure to data growth."
But the bank added that the transactions might raise questions about capital allocation.
"The S$2.47 billion consideration amount is at about 10 per cent discount to the value of the implied stakes in AIS/Airtel/Thaicom, which we view as reasonable. But while we share Singtel's positive views on AIS and Airtel, we note the near-term value accretion to Singtel is marginal.
"Investors may question if the capital would have been better invested in higher-growth (albeit more risky) digital businesses. These transactions also highlight the broader issue of capital allocation between Singtel and its major shareholder."
Amendment note: In the previous article, BNP Paribas said the S$2.47 billion consideration amount is at 10 per cent premium to the value of the implied stakes in AIS/Airtel/Thaicom. It has since corrected this and said it should be at a 10 per cent discount to the value of the implied stakes.