Singtel's billion-dollar impairment the right call after longtime earnings drag: Analysts

SINGTEL is set to take S$1.21 billion in net exceptional losses for the financial year - but stock watchers looked beyond the eye-popping headline figure disclosed on Friday, to focus on the potential for a turnaround.

The latest impairments on struggling digital business units are "the bitter pill for a better tomorrow", Citi analysts Arthur Pineda and Hussaini Saifee said in a research note.

Similarly, Singtel chief financial officer Arthur Lang called taking impairments "the conservative thing to do" and stressed that these costs are unrelated to a fresh strategic review of these business units.

The move spooked punters - Singtel ended lower by S$0.09 or 3.73 per cent to S$2.32, with 71.6 million shares traded, after the news.

But analysts were less rattled, noting that the impairments - which include S$839 million in the second half - are unlikely to affect dividends.

"Singtel has been paying dividends based on underlying profits. These one-off items, although optically negative, are also mainly non-cash in nature," the Citi team wrote.

The exceptional charges were attributed mainly to impairments from digital life unit Amobee, which focuses on advertising technology; the global cyber security business, underpinned by Trustwave Holdings; and Australian telco subsidiary Optus.

Singtel has estimated that Amobee will record non-cash impairment charges of S$589 million to its intangible assets and goodwill for the six months to March 31, 2021, against S$195 million in the year-ago period. The cyber security business will record similar charges of S$336 million, compared with none previously.

DBS analyst Sachin Mittal suggested that the revaluation of Amobee and the cyber security business was meant "to attract strategic investors or partial divestment of both the US-based businesses", as Singtel "does not enjoy much strategic leverage" and may have struggled to attract strategic investors at higher valuations.

The accounting move would leave Amobee with a carrying value of S$511 million, while the cyber security business has a remaining carrying value of S$695 million.

Optus also expects to record exceptional charges of S$305 million, including on legacy fixed access networks that will no longer be used.

But Paul Chew, head of research at Phillip Securities, noted that the bulk of impairments come from loss-making businesses - so the charges do not affect his valuation of the stock.

Singtel has embarked on a strategic review of the Amobee and cyber security units, which it said in a bourse filing was "to sharpen the group's focus and ensure that these assets are positioned for growth".

Repositioning Amobee and Trustwave will allow Singtel to reshape its portfolio and focus on value creation, said the group. Its options may include the restructuring of product or business segments for these subsidiaries, full or partial divestment of the businesses, or business combinations with other industry players.

The review could take up to 12 months, according to new Singtel chief executive Yuen Kuan Moon, who ascended to the top job this January.

To be sure, the exercise comes less than two years after Simon Israel, then the chairman, assured shareholders that "management intends to unlock this value" from its digital investments. Now, Mr Chew has argued that the review is unlikely to unlock value, since the businesses were unprofitable even before the pandemic.

Amobee reported a loss before interest and taxes of US$32 million in the six months to Sept 30, 2020, against US$11 million previously while Trustwave had a comparable loss of US$55 million for the period, from US$48 million before.

Still, Citi had a positive view of how Singtel is "taking steps to address value traps and earnings drag" with an eye to monetising the assets.

Indeed, when asked why Singtel is holding a review now, Mr Yuen told a briefing that digital advertising and cyber security had been identified as "very attractive growth sectors" - but "the ability to scale has actually been extended" by the pandemic.

The management reiterated in its briefing that it has learnt lessons such as the need to co-invest with strategic partners and take "significant minority positions". Amobee, which was acquired in 2012, and Trustwave, which was fully acquired in 2015, are now both wholly owned.

But when asked if Singtel was disavowing its old investment approach, Mr Yuen replied: "In any new businesses, there are always risks involved, and the important thing is the ability to move fast and recognise the trends and quickly take action. And that is what we are doing now."

Still, Singtel could make it out with a little something to show for its pains. It expects the exceptional losses to be offset in part by an estimated S$98 million gain from a dilution in Singtel's effective shareholding in Bharti Airtel, after shares were issued by the latter as partial consideration for acquiring equity interest in Bharti Telemedia in March this year.

More uplift could come from the long-awaited sale of Optus' towers in Australia, especially as Bloomberg reported this week that first-round offers in the roughly A$2 billion (S$2.1 billion) deal could come as early as end-May.

"Singtel stands to book material gains on sale from that transaction which could counter these impairments. So while H2 2021 could be compressed, H1 2022 should book gains if it completes its sale of assets," the Citi analysts noted in their report.

Mr Mittal also called Singtel's Singapore data centre business "another contender for listing/divestment".

He believes investors may wait for more concrete actions, such as a tower sale, before the counter trades upwards; but, until then, Citi suggested that share price weakness offers "an enhanced opportunity to buy".

Said Mr Lang: "The impairment is really reflecting the challenges that we have faced. We take it. It is the right thing to do, it is the conservative thing to do. And then the strategic review is really looking forward. So it's really two separate things that we are announcing today. I just want to be very clear on what we are doing."

Saying Singtel is "resetting and regrouping", Mr Yuen added: "What is important is that now, as the new incoming CEO, I am taking full responsibility for putting us on the right footing moving forward. And I look forward to unveiling the full strategy for the future when we announce our earnings in two weeks' time."

Singtel is due to report its H2 and FY2021 results on May 27.

With additional reporting by Michelle Zhu