Singtel

Kim Eng on 6 Mar 2012

Downgrade to Sell. SingTel’s organisational restructuring is broad in scope while the acquisition of US-based solutions provider Amobee is far-reaching in its potential implications for the future. While we have no arguments with these developments in the longer term, we expect further downward pressure on the already-challenged margins in the short term. While SingTel can afford the US$321m price tag for Amobee, the ability to improve dividends could come under question. We believe the group is poised to make more acquisitions after Amobee as it embarks on its Digital L!fe strategy. Downgrade to Sell with a target price of $2.80, based on 11x FY Mar13F PER.

Announces major organisational restructuring, acquisition. SingTel has announced an organisational restructuring that cuts across all business segments and geographies, away from a traditional country-centric model. In addition, it has staked its claim on the mobile advertising market via a US$321m acquisition of Amobee. The worldwide mobile advertising market is estimated by Gartner to double from last year to US$6.8b this year.

Bold, necessary but slow off the mark. We have mixed emotions about SingTel’s restructuring. In our view, it is a bold move as it illustrates how serious the group is in addressing threats to its business, and also necessary as its space has been encroached upon by non-traditional rivals. However, as in any restructuring, operating costs could spike in the short term and this could further affect margins that are already under pressure. In addition, implementation is a concern.

Further acquisitions may cap dividend upside. The valuation SingTel is paying for Amobee does not seem out-of-line with acquisitions of similar companies by others. However, it is still a big chunk of change. The acquisition cost represents 27% of the telco’s cash holdings as at end-3QFY Mar12. While it will probably not affect the group’s dividend, it may cap upside beyond the 55-70% payout range and could dash hopes for further capital management.