Singtel – Potential for special dividend

Excerpts from Maybank report

Singtel (SGX: Z74)

• Singtel has entered into a strategic partnership with KKR to divest up to 20% of its Regional Data Centre (RDC) business for SGD1.1b.
• This values the RDC business at an enterprise value of SGD5.5b (translating to 31x FY24E EV/EBITDA) with an option to increase its stake to 25% by 2027 at the pre-agreed valuation.
• This transaction has unlocked SGD2b out of SGD6b of latent value within Singtel group. The cash proceeds from this deal would be used as growth capital and may lead to a high special dividend.

Reiterate BUY with an SOTP TP of SGD3.10.

Partnership with KKR to increase its global footprint

Given KKR’s strong track record in global data centre investments and RDC infrastructure capabilities, we believe this synergistic deal is beneficial for Singtel as the group strives to expand regionally while potentially opening up opportunities for the group around the world. Backed by KKR’s reputation and credibility, this is in line with Singtel’s commitment to seek strategic partnerships to ramp up its RDC business. Singtel noted that cash proceeds from the sale would give the group flexibility for further expansion for growth (RDC and NCS) coupled with returns to shareholders.

Valuation reflects quality of RDC portfolio

We think the valuation of this deal is on point given:

• Digital InfraCo 1QFY24 EBITDA of SGD44m implies an annualised FY24E 31x EV/EBITDA multiple, a decent valuation given that recent global transactions range from 23x-37x. At 37x for Time dotCom’s 70% divestment of AIMS Data Centre to Digital Bridge group
• KKR’s recent USD15b acquisition of CyrusOne in 2021, a much larger and stable global data centre operator with ~50 DCs across Europe and US transacted at 25x EV/EBITDA multiple accentuates the quality of Singtel’s RDC portfolio and growth potential.
• Singtel’s RDC FY23-26E EBITDA growth is likely to be stronger vs regional peers as its capacity in Singapore will increase to 120MW by FY25E from 62MW currently.

Unlocking shareholders’ value, special dividend likely

SingTel has undertaken about SGD4b of capital recycling after the stake sale of its RDC business, with the rest likely coming from sweating down its stakes in its regional associates (valued at SGD49b as at end-Q1FY24). Moreover, with additional proceeds from the RDC stake sale, Singtel has SGD2-3b of excess cash after accounting for current growth initiatives and 5G capex. Assuming no new large growth initiatives, we believe that the excess cash may lead to a special dividend towards the higher end of the group’s 60-80% of underlying PATMI dividend policy.

You can find the full report here and the company website here.