- To acquire Australia’s largest privately-owned IT service company for S$325m
- Acquisition price translates to a reasonable 23-24x Price to Earnings ratio (PER) and the intent is to scale up Dialog Australia with more product offerings.
- Maintain BUY on Singtel with unchanged TP of S$3.13. Singtel is attractive for ~4% yield and holding company discount in excess of 35% vs 21% historical average.
Singtel to pay A$325 million (S$325 million) for acquisition of The Dialog Group (Dialog) as part of NCS’ regionalization strategy. Dialog is Australia’s largest privately-owned IT services company The acquisition is EBIT accretive from day one and meets Singtel’s ROIC hurdles. Singtel expects meaningful EBIT contributions for NCS from Dialog moving forward. According to Gartner, IT spending in Australia is showing its strongest growth in a decade and is projected to grow 6.5% in 2022. The largest IT spending segment in Australia is IT services, which is expected to grow 6.1% to A$39 billion in 20221.
The acquisition bolsters NCS’ proposition in Australia:
- Immediate scale: trebles the number of IT specialists in Australia to 1,300 in total presence across Brisbane, Sydney, Melbourne, Canberra, Perth, Darwin, and Adelaide
- Greater market access: Dialog is a trusted brand with over 40 years of experience. Counts a number of tier-1 clients from a multitude of sectors, including government, healthcare, transport, communications, financial and commercial services.
- Complementary business: Leverage complementary capabilities and expertise to create a stronger end-to-end suite of technology and digital services for NCS’ clients in Australia and across the region
NCS acquired Riley & Eightly20 Sultions in Australia earlier
Source: Company, DBS Bank
This latest deal follows NCS NEXT’s acquisition of two fast-growing technology companies last year. Riley is a cloud consultancy with dedicated expertise in Google cloud applications and Eighty20 Solutions is a cloud transformation specialist with unique capabilities across Microsoft cloud platforms, thus offering a ‘best-of-cloud’ service portfolio to the Australian market.
Acquisition price translates to a reasonable 23-24x PER. Our checks indicate that Dialog secured A$176m revenue and A$12m profit in June 2021 (FY June) dropping almost 15% due to COVID impact. Acquisition price translates to a reasonable 23-24x PER assuming some recovery in June 2022. Dialog’s main customers are federal and provincial governments in Australia and is a strong brand in Australia for system integration projects but lacking on innovative product offerings. Coupled with other acquisitions in Australia and NCS expertise in Singapore, Dialog should be able to offer innovative solutions in Australia in our view.
We maintain BUY on Singtel for its 4% yield and over 35% holding company discount vs 21% historical average.