SingTel’s Australia NBN proposal rejected

The Australian government announced this morning that it was not accepting any of the proposals submitted to build their National Broadband Network (NBN), including that of SingTel’s Optus Network Investments. Instead, the government will take A$4.7bn to fund the equity of a company that will begin building the Australian NBN and then later seek to bring the private sector into the project (initially capped at 49%). In total, it expects the project could cost A$43bn over eight years. Moreover, the government announced that it will begin a consultative process to review the regulatory regime.

Although SingTel’s proposal was rejected, we view this outcome as a positive for the company. Most importantly, the government’s initial majority ownership of the network and the intent to review the regulatory regime appear to be positive steps towards meeting SingTel’s main strategic objective in Australia with regards to the NBN, i.e. move the fixed-line industry towards a more level playing field by having an open access and structurally separate NBN. Secondly, the large size of the project would have added a significant financial burden to SingTel had they won.

We view this news as a net positive for SingTel in that it should improve SingTel’s position in the Australian fixed-line sector over the long-term. In the short-term, however, this news has no impact to our earnings or price target. Our 12-month SOTP price target of S$2.43 capitalizes our estimates of the Singapore and Australian normalized EV FCF yield of 7.5%. We also use a mixture of market prices and target prices (where available) of SingTel's associates before applying a 20% holding company discount to these assets. Currency volatility is a key upside and downside risk to SingTel’s valuation, which recently has moved in SingTel’s favor.

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