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Brokers' take: Singtel dividends to get boost from associate's 10.3t rupiah tower sale, says DBS

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DBS maintained its "buy" call for Singtel and S$2.69 target price.

CASH receipts from the 10.3 trillion rupiah (S$950 million) sale of 6,050 telecommunication towers by Singapore Telecommunications' (Singtel) Indonesian joint venture company will likely support the Singapore telco's dividends, according to DBS Group Research.

RHB also said in a note on Monday that it views the monetisation of such non-core assets positively.

Jakarta-based wireless network provider Telekomunikasi Selular (Telkomsel), in which Singtel has a 35 per cent stake, will sell the towers to Dayamitra Telekomunikasi (Mitratel), Singtel said in a bourse filing last Friday.

In addition, Telkomsel has inked a 10-year lease arrangement with Mitratel to rent tower space after the towers have been transferred to the buyer. No details have been released on the tenancy ratio of these towers and the leaseback price.

Indonesia-listed, state-owned giant Telekomunikasi Indonesia (Persero), also known as Telkom, owns the other 65 per cent interest in Telkomsel as well as the entire stake in Mitratel. The latter manages telecommunication towers and serves all cellular operators in Indonesia.

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DBS analyst Sachin Mittal wrote on Monday that Telkomsel, being a net cash company, can upstream dividends to its shareholders including Singtel.

Upon the conclusion of the tower sale, Singtel will receive about S$333 million in pre-tax contributions from the Indonesian associate, Mr Mittal said. This will help the Singapore company meet its dividend obligations for FY21, he added.

"We project S$2 billion to be paid in dividends by Singtel in FY21 (ending next March), although half of this amount could potentially be paid in scrip to Singtel's largest shareholder Temasek," the analyst said.

Singtel's management is expected to confirm the FY21 dividend with the upcoming financial results for Q2 FY21.

The tower sale is expected to be carried out in stages and completed by the first quarter of 2021.

It will allow Telkomsel to optimise its capital structure as the company focuses on its core business of providing digital connectivity services to customers in Indonesia, said Singtel.

Meanwhile, RHB said Telkomsel's monetisation of these non-core assets will unlock shareholder value with the shift in capital expenditure (capex) to operating expenditure, as well as streamline capex in the longer term.

Proceeds from the sale will work out to about S$0.02 per Singtel share for its stake, RHB added.

Details of the sale and leaseback terms are "likely to be accommodative" in RHB's view, considering the large number of towers and Mitratel being Telkom's wholly-owned tower arm.

DBS on Monday noted that the purchase price per tower of 1.7 billion rupiah is lower than the 2.1 billion rupiah paid per tower for the Indosat deal, although the leaseback price and tenancy ratio for this Telkomsel transaction "could be quite different".

Late last year, Mitratel had bought 2,100 towers from Indonesian telco Indosat for some 4.4 trillion rupiah in a similar leaseback deal.

Telkom said in an exchange filing last week that Mitratel will have more than 22,000 towers after it completes the Telkomsel tower acquisition.

DBS said that an initial public offering will be possible for Mitratel once it becomes the country's largest tower player, surpassing Sarana Menara Nusantara, following the Telkomsel transaction.

Mr Mittal on Monday also said that Singtel's core business is undervalued, and that asset divestment is required to unlock the trapped value.

"The market value of Singtel's associate is S$2.17 per share, same as Singtel's share price, and implies that the market is not assigning any value to its profitable core business in Singapore and Australia," he wrote.

DBS's fair value for Singtel's core business is S$0.48 per share based on peer multiples, while its fair value of associates is S$2.46 per share without any holding company discount.

DBS maintained its "buy" call for Singtel and S$2.69 target price. RHB has a "buy" rating and a S$3.10 target.

Singtel shares were trading at S$2.16 as at 1.03pm on Monday, down S$0.01 or 0.5 per cent.

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