Discounting SingTel

Singapore Telecom is in the spotlight.

After the telecom operator's Indian partner Bharti Airtel, in which it owns a 30 per cent stake, walked away from high-profile merger talks with South Africa's MTN, SingTel is now looking elsewhere for growth. It's understood to be mulling an investment in China Telecom.

Investors remain bullish on the stock – which is estimated to trade at roughly a 16 per cent premium to its net asset value. That might not be warranted.

SingTel is effectively a conglomerate. Its small and mature domestic market – with a population of just 4.7 million and mobile penetration at 130 per cent – has long prompted it to go abroad.

Aside from its wholly-owned assets in Singapore and Australia, its portfolio includes minority holdings in India's Bharti Airtel, Indonesia's Telkomsel, and Globe Telecom in the Philippines. Associates make up over half of its sum-of-the-parts equity value.

Financially, SingTel's strategy has not served it badly. It paid just $US400 million for 20 per cent of Bharti before the Indian company's listing. Fast forward eight years, and the investment is now worth $7.5 billion.

Yet the Indian growth engine is gradually slowing and, without a transformative deal, so too will the stake's leapfrog value. True, the trick worked for Vodafone's investment in China Mobile. Yet Beijing's restructuring of the domestic phone market also highlights how such a stake can be vulnerable.

Indeed, investors should be concerned by SingTel's growing collection of minority holdings. Sure, it has a few board seats, but none come with a clear path to control. In Indonesia, SingTel and its controlling shareholder Temasek are stuck in a long-running, politically-driven legal dispute over ownership rights. So far, SingTel has not turned any holdings into majorities.

SingTel trades at a premium because it's a large, trusted household name in what's considered globally to be a defensive market. Yet such generosity is misguided. SingTel may have geared up last year to pay out a special dividend to shareholders – but not this year. It's even facing higher capital outlays from a potential roll-out of new, faster fibre networks. If anything, SingTel deserves a discount.

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