Selling stakes in Thai assets can be right call for Singtel

While Singtel's investments in Intouch Holdings and Advanced Info Service (AIS) hold long-term strategic value, a takeover offer from Thai power producer Gulf Energy Development would provide the Singapore telco with financial flexibility to fund its 5G investment priorities and ease pressure on free cash flow, said Fitch Ratings.

Gulf, which is controlled by Thai billionaire Sarath Ratanavadi, on Monday launched a 169 billion baht (S$7.2 billion) takeover bid for Intouch, which controls AIS, Thailand's largest mobile operator.

Singtel is the biggest shareholder of Intouch with a 21 per cent stake, while also holding about 23 per cent of AIS.

Singtel's Intouch and AIS holdings offer it a stable source of cash flow, in the light of AIS' entrenched market position and the stabilising competition in Thailand, Fitch said.

The two companies contribute 20 per cent to Singtel's total dividends received, and 5-6 per cent of adjusted group earnings before interest, taxes, depreciation and amortisation (Ebitda), inclusive of associate dividends, it noted.

However, the rating agency noted that "Singtel faces intense rivalry in other key markets like Singapore, Australia, Indonesia, the Philippines and India, contributing to slow recovery prospects over the next 12-18 months amid Covid-19 restrictions and structural challenges in the Australian fixed-line business".

Singtel's other capital-raising options include a potential tower sale by Singtel Optus, disposing of minority stakes in Singapore Post and NetLink Trust, and longer-term plans to monetise digital assets.

"However, we have not taken these into consideration in our ratings due to the uncertainty over the timing and transaction value," Fitch noted in a report on Monday.

"A disciplined financial policy remains a key driver of our 'stable outlook' on Singtel's ratings due to the low rating headroom," said Fitch.

It added that the Gulf offer casts uncertainty over the shareholding structure of AIS.

Fitch is likely to place AIS' ratings on watch should the deal lead to an eventual buyout.

The tender offer for all shares in AIS depends on Gulf acquiring at least 50 per cent of Intouch, from 19 per cent currently.

The transaction is still at its early stage, pending various approvals.

It remains unclear how Gulf intends to fund the substantial deal, and the ultimate equity interest which it will obtain in both Thai companies, said Fitch.

It added that the acquisition of Intouch and AIS would provide Gulf with a more diversified cash flow and a larger income base, although a debt-funded structure is likely to place additional pressure on the latter's stretched balance sheet.

Last year, Gulf generated an Ebitda of 13.5 billion baht, which was a fraction of AIS' 76.6 billion baht.

However, Gulf's net debt-to-Ebitda ratio was 8.8 times compared with AIS' 1.0.