Undervalued Singtel needs boost from stronger Optus performance: analysts

SINGAPORE telco giant Singtel on Mar 13 rubbished a news report – for the second time in two months – claiming it intends to sell its stake in Australian subsidiary Optus.

The group said “there is no impending deal to offload Optus for the said sum”. It added that “Optus remains an integral and strategic part of the Singtel Group”.

Investors, however, appear to believe something could indeed be brewing. Shares in Singtel rose 4.2 per cent on Mar 13, and have continued to add another 1.6 per cent since then to close at S$2.52 on Wednesday (Mar 20).

Despite the climb, analysts believe that Singtel’s shares remain undervalued. They added that it would take a stronger recovery from Optus for markets to have greater confidence in the stock.

DBS analyst Sachin Mittal noted that Singtel’s associate investments alone are worth S$2.51 per share, which is just shy of its share price.

While the local telco has recently made moves to “illuminate” value, which include the sale of a 0.8 per cent stake in Indian associate, Bharti Airtel, he said that this has not worked so far.

Mittal added that the company’s share price remains undervalued largely because of Optus’s low return on invested capital (ROIC).

Based on annualised returns, Optus delivered an ROIC of below 2 per cent, compared to the cost of capital of 7 to 8 per cent, Mittal said. “While Optus is on a recovery path with industry-wide tariff hikes, its ROIC is sub-optimal.”

Furthermore, he noted that Optus has been hit by a string of incidents, which have made it less desirable as an acquisition target as well. In November last year, Kelly Bayer Rosmarin stepped down as chief executive of Optus after an outage took down phone and Internet services for 14 hours. This incident came after the company suffered a data breach in September 2022.

“It has led to a slower recovery path for the core business,” Mittal said, adding that the company saw a severe deterioration in profitability during Covid-19. “I think as long as Optus delivers, the chances of its sale increase…if it doesn’t, then it becomes a tough business to sell,” he explained, adding that the market will be looking out for the profitability of the telco.

AlixPartners Singapore partner and managing director Sai Tunuguntla agreed that it will be an uphill battle for Optus to raise its ROIC. “Competing with Telstra on mobile coverage and B2B will require significant capex, making the earnings before interest and tax and ROIC even lower,” he said.

Still, he pointed out that Optus contributes a significant proportion of Singtel’s revenues and a divestment would leave the Singapore telco substantially smaller.

Instead of carving out parts of the company to sell, which may not be as straightforward, Tunuguntla said that telcos in the region are drawing in private equity investments in infrastructure or digital businesses to establish a valuation basis and educate investors.

In September last year, private equity firm KKR committed up to S$1.1 billion for a 20 per cent stake in Singtel’s regional data centre business. The deal valued the business at S$5.5 billion.

Meanwhile, UOB Kay Hian analysts Chong Lee Len and Llelleythan Tan said that the company intends to regularly review its portfolio.

“While we do not expect Singtel to sell a substantial stake in Optus, we also do not discount a potential stake sale in Optus should a strategic partner emerge,” they noted.

They added that, at about A$16 billion (S$14 billion) to A$18 billion in enterprise value, Optus would be valued at about 7.5 to 8.5 times its earnings before interest, taxes, depreciation and amortisation (Ebitda).

Similarly, OCBC Investment Research analysts believe that while a complete sale of Optus seems unlikely at the moment, Singtel appears to have left the door open for a potential partial stake sale to improve the group’s ROIC and unlock value for the company.

They added that Singtel has set a S$6 billion capital recycling target over the next two to three years.

After the sale of stake in its regional data centre business and Comcentre – as well as the sale of shares in Bharti Airtel, which was announced in March 2024 – the company will still need to unlock about S$3 billion in capital.

“The proceeds from asset recycling could be used to strengthen the balance sheet and boost shareholder returns,” the analysts said.

RHB research analysts pointed out that in Singtel’s previous announcements, the company has referred to Optus as a long-term strategic investment.

“There is a delicate balancing act here as a potential deconsolidation of Optus could see significant earnings dilution, given that Optus contributes over two-thirds of the group’s consolidated Ebitda,” they added.