Airtel divestment: Why Singtel is on a selling spree

By Lee Kah Whye
Singapore, August 29 : Last week, a day after reporting its first quarter 2022 financial results, Singtel announced on August 25 that it would sell a 3.3 per cent stake in India's Bharti Airtel Ltd to Bharti Telecom Ltd for an aggregate consideration of about USD 1.61 billion.
Southeast Asia's largest telecommunications operator by market capitalisation said that proceeds from the sale may be used to reduce the group's debt and fund 5G capital expenditures and growth initiatives.
Considering that Airtel's financial performance was one of the two main reasons for profit soaring over 41 per cent for the financial quarter which ended in June, this seems surprising. Airtel pre-tax contribution to Singtel's profits rose 145.6 per cent from SGD 64 million (USD 46 million) to SGD 156 million (USD 112 million). It is the only one of its regional associates whose earnings rose compared with the same period last year.
A detailed reading of notes contained in Singtel's Q1 business update filed with the Singapore Exchange however reveals that the performance of Airtel is due to exceptional gains from one-off items. This included a fair value gain on revaluation of its foreign currency convertible bonds and recognition of a deferred tax credit in Africa.
The other reason cited for the profit surge was the partial recognition of its November 2021 SGD 1.87 billion (USD 1.35 billion) sale of its 70 percent shareholding in Australia Tower Network (ATN) during this reporting quarter. This resulted in a once-off gain of SGD 84 million (USD 60.5 million). Singtel is amortising 30 per cent of the gains from the sale of ATN over 20 years.
On an operational level, Singtel did not perform well. Operating revenue fell 5.6 per cent to SGD 3.584 billion (USD 2.58 billion) compared with the same quarter in 2021. EBITDA (earnings before interest, taxes, depreciation and amortisation) fell 2 per cent to SGD 977 million from SGD 997 million.
That the Singapore telco is paring down its assets should come as no surprise. When current CEO Yuen Kuan Moon unveiled his new strategic vision in May 2021, five months after taking over, he said that the new direction is "designed to capture untapped digital growth in the 5G era, sharpen the Group's focus and improve shareholder value."
To this end, the company will be "leveraging its 5G leadership to reinvigorate its core consumer and enterprise businesses; developing new growth engines in ICT and digital services; and unlocking the value of its quality infrastructure assets."
The sale of ATN was the first major step in unlocking the value of its infrastructure assets. In the announcement of the sale back in November 2021, the company said that the "funds will go towards Singtel's 5G roll-out, the expansion of its technology services arm NCS' digital services business and other growth initiatives."
NCS is Singtel's information and communications technology service arm, and it provides services and solutions in consulting, digital technology and cybersecurity across the Asia Pacific.
Earlier last week, Bloomberg quoting sources reported that Singtel was moving forward with the sale of its Chicago-based cyber security business, Trustwave Holdings. Between USD 200 million and USD 300 million could be raised from the sale.
It had bought a 98 per cent stake in Trustwave in 2015 for USD 810 million. Trustwave has been loss-making and Sintel took a USD 250 million non-cash impairment charge against this investment in May 2021. It did however sell SecureTrust, its payment card industry compliance business, for USD 80 million in October 2021.
In another loss-making asset disposal exercise, it sold Amobee to New York-headquartered advertising technology company Tremor International for total consideration of USD 239 million in July this year. It had acquired Amobee in 2012 for an above-market valuation of USD 321 million. Back then, it said that this was to increase its share of the digital consumer wallet and to shape the digital ecosystem. Amobee, which was founded in 2005, was a fast-growing provider of mobile advertising solutions to operators, publishers and advertisers globally.
Singtel's upcoming asset disposal plans do not stop with Trustwave. Bloomberg also reported that it is also considering options including a potential stake sale in the fibre assets of its Australian subsidiary SingTel Optus.
DBS analyst Sachin Mittal said to Singapore financial newspaper Business Times in July that he expects that the sale of Trustwave and Amobee will help Singtel avoid an estimated SGD 200 million to SGD 210 million in annual operating losses.
The stock market appears to rate the telco's asset trimming positively. Since news seeped out about its plans in July, the company's share price has been on the rise. It was at a six-month low of SGD2.41 on June 17 and has since climbed about 10 per cent to close at SGD 2.65 last Friday on August 26.
Mittal raised his target price for Singtel to SGD 3.24 from SGD 3.20 and maintained a "buy" call for the stock.
"Among regional telcos, Singtel offers far superior growth than other telcos that pay dividends," Mittal said. "While core business segments were hit during Covid lockdowns, they are gradually recovering."
Singtel appears to be selling its assets to streamline its portfolio to raise cash and focus on 5G operations as well as to develop new growth engines including IT services and data centres.
In the business update released on August 24, Singtel CEO Yuen Kuan Moon said, "This set of positive results reflects the progress made on our strategic reset designed to strengthen our core, unlock the value of our assets and grow new digital businesses."
"Looking ahead, we expect the operating environment to remain challenging amid rising inflation and interest rates, and as continuing geopolitical tensions further impact global supply chains. We will need to stay nimble and contend with these realities should they put further pressure on our costs and bottomlines."