4% yield with decent growth prospects
Asset enhancement at Comcentre & delay in Singapore recovery
Comcentre re-development to extend the life and value of the asset while freeing up cash, non-material impact on earnings. The Comcentre building was built in 1979 and needed to be rejuvenated. Through this re-development, Singtel would extend the lease to 2089 and create an asset with a recurring revenue stream. Singtel expects to re-develop its Comcentre headquarters into a S$3bn asset, based on the gross development value upon completion, vs. the development cost of S$2.7bn to be incurred by the joint venture company (JVCo). Singtel will also secure net cash proceeds of S$660m-910m from the JVCo; although, the JVCo’s debt will sit on Singtel’s balance sheet.
Singtel and Lendlease to enter into a joint venture for the redevelopment. Lendlease will subscribe to 49% of the shares of the JVCo in 2024 and Singtel will hold 51%. The JVCo will pay S$1.63bn to Singtel for the land cost of the development around 2024. The total cost of the redevelopment (including land cost of S$1.63bn, construction and financing costs) is expected to be in the region of S$2.7bn. This will be funded by a combination of debt and equity from Singtel and Lendlease.
Singtel’s capital contribution for the JVCo is estimated to be between S$420m and S$570m, depending on the debt to be raised by the JVCo. Singtel will also be responsible for the differential premium payable (an estimated S$300-400m) to extend the lease to 2089 and for changing the building to ensure it can be used as commercial office space. Overall, Singtel will incur S$720m-970m in capital contributions to the JVCo and differential premiums payable, while receiving S$1.63bn for the land. The JVCo will sit on Singtel’s balance sheet with the latter having a 51% stake in the JVCo.
Long-term recurring revenue once completed in 2028. The development is expected to have a total gross floor area in excess of 110,000 square metres, comprising two 20-storey buildings of premium grade/Grade A office space with views of the CBD and surrounding Orchard precinct. At the ground level, a large, sheltered arcade and vibrant urban space will offer almost 3,000 square metres of F&B, lifestyle, and retail space, including Singtel’s new flagship store. The proposed design also includes an elevated rooftop park featuring a 300-person auditorium, a running and walking track, and an integrated wellness hub. As the anchor tenant, Singtel is expected to occupy about 30% of the total space in the new development.
Delay in Singapore recovery
2H22 core underlying operating profit was weak due to Singapore, while Australia continued to recover. Core EBIT excludes National Broadband Network (NBN) migration revenue in Australia and job support scheme grants in Singapore, which will be largely absent going forward. 1H22 underlying core EBIT (before associates’ contribution) of S$454m rose 6% y-o-y but declined 12% compared to 1H22 – the main culprit was the Singapore consumer business. Underlying Singapore consumer EBIT declined to S$128m (-7% y-o-y) compared to our expectations of S$165m, mainly due to premium handset shortages, an increased shift towards SIM-only plans, and longer replacement cycles. Underlying Australia consumer EBIT of S$122m (+100% y-o-y), compared to S$94m in 1H22, was in line.
2H22 Singapore mobile service revenue did not see much recovery due to non-recovery of roaming revenue and consumers moving to SIM-only plans. Roaming revenue is positively correlated to rising tourists in the country, but 2H22 did not see many tourists despite the reopening of Singapore, due to the Omicron threat to some extent. Furthermore, lower equipment sales stemming from supply constraints caused by global chipset shortages and more SIM-only plans impacted the Singapore business.
2H22 associate post-tax contribution of S$774m (+18% y-o-y, +3% h-o-h) was 8% below our expectations despite a solid Bharti. Bharti contributed S$198m in profit in 2H22 compared to S$50m in 1H22 and a S$9m loss in 1H21, in line with our estimates. However, this was partially offset by (i) Globe contributing only S$97m in profit in 2H22, compared to S$136m in 1H22; and (ii) Telkomsel contributing S$342m in 1H22 compared to S$365m in 1H22