Singtel's redevelopment of Comcentre to unlock value is a well-trodden path

SINGTEL said last Wednesday (Feb 23) that it would be redeveloping its Comcentre headquarters into an office development to maximise the site's potential, and unlock value from the property.

The new Comcentre - which will cost over S$2 billion - is expected to have a total gross floor area of over 110,000 square metres comprising offices, a retail component, and Singtel's existing Orchard Exchange, which houses telecom infrastructure.

Singtel will divest Comcentre to a joint venture company, formed with an appointed developer, and hold a majority stake. It would be the anchor tenant, occupying 30 per cent of the space, while leasing out the remainder, and the group noted that this would contribute a recurring income stream for the group in the long term,

The move effectively makes Singtel a landlord of a fairly large office and retail building in a prime area in Singapore, and would help diversify its revenue streams.

Investors looking for cues as to what happens next can look to the examples of several other large locally listed companies that have taken similar initiatives in the past.

Property income

Singapore Post - which happens to be an associate company of Singtel - also has a property segment that derives revenue from commercial property rentals as well as the self-storage business.

Notably, this includes the Singpost Centre retail mall at Paya Lebar, which underwent a S$150 million redevelopment between 2015 to 2017, doubling the retail space to around 25,000 sq m.

The property segment accounted for 9 per cent of total revenue, and around a third of the postal company's operating profits in the financial years ended 2019 and 2020.

In its FY2019 annual report, SingPost noted that the property segment did well, with segment revenue rising by 13.5 per cent and profit on operating activities growing 29.8 per cent for the full year. The good performance was largely attributed to the rental income from the SingPost Centre.

Even during the pandemic, committed occupancy at the SingPost Centre mall and office "remained high", with operating profit from its property segment remaining relatively stable, even as the post and parcel segments saw a decline.

Singapore Press Holdings (SPH) was also another player that had success in developing and growing a property portfolio.

Around the mid-1990s, the company acquired The Promenade for S$271 million and the Paragon by Sogo for S$682 million; both buildings were later redeveloped into what is now Paragon.

The company had also said then that it was aiming to build up a large portfolio of quality properties, which could provide diversification and could also be hived off later. It subsequently spun off some properties under SPH Reit in 2013.

The property business also helped with SPH's financial results in later years as the media business underwent a decline with declining revenue and profits.

Benefits for Singtel

There has been no significant reaction to Singtel's share price following the announcement, but investors are unlikely to complain about more diversified revenue streams and action being taken to unlock asset value.

Singtel saw a significant hit to its bottom line during FY21 ended March 2021, with underlying net profit falling 30 per cent on year to S$1.73 billion, amid Covid-19 headwinds that led to lower roaming and pre-paid revenues.

DBS group research said in a note last Wednesday that the divestment and redevelopment of Comcentre could bring a 2-3 per cent benefit to Singtel's earnings, while making the company asset lighter.

It noted that there is no Grade A office building in Orchard currently, and estimates that the new Comcentre could contribute to additional pre-tax earnings of S$48-60 million. The research house assumed Singtel would take a 51 per cent stake in the JV, with its occupied space obtained for free.

While the additional revenue will be able to provide diversification in future when the core business is struggling, investors would likely be more interested in whether Singtel is able to make good use of the additional property revenue to grow its businesses instead of having it serve as a replacement for other declining segments.

They may draw some positives from Singtel's chief executive Yuen Kuan Moon, who said: "We strive to optimise the capital we can unlock from existing assets to fund our growth initiatives including 5G and the regional expansion of our data centre business."

The group embarked on a "strategic reset" last year, seeking to focus its business to capitalise on technology proliferation and digitalisation. This includes "leveraging its 5G leadership to reinvigorate its core consumer and enterprise businesses", and develop new growth areas in infocomm technology as well as digital services.

The telco industry has faced challenges coming from the tech

giants, and Singtel, with its business concentrated in telecom services both locally and abroad, has not been spared.

Earnings per share based on underlying net profit has steadily declined from S$0.2407 in FY2017 to S$0.1059 in FY2021. Over the same period, annual dividends have also fallen from S$0.175 to S$0.075.

An investor who bought Singtel shares 5 years ago and reinvested dividends in shares would have lost around 19 per cent, as of Monday (Feb 28), according to Bloomberg data.

There are some signs of recovery in its latest results, with the group reporting a 1 per cent increase in underlying operating revenue for the first 9 months of FY22, with underlying net profit also growing 10.8 per cent.

For the year to date, the counter is up 8.6 per cent as of Monday, closing at S$2.52, but this is still below the average analyst target price of S$3.16, according to Bloomberg data.

Property income may help provide diversified revenue streams for Singtel, but the company would probably need to show that its strategic plans to expand the core business can bear fruit before investors find the shares attractive once more.