The increase in public transport fares from December onwards is not likely to make a significant impact on ComfortDelGro&rsquo s (CDG) C52 0.78% earnings for the FY2024 ending December 2024, say the analysts from CGS-CIMB Research and PhillipCapital.

 

The public transport operator has a 75% stake in SBS Transit S61 0.00% , which is Singapore&rsquo s largest scheduled public bus operator. SBS Transit also operates several train lines such as the North East Line (NEL) and the Downtown Line (DTL), as well as the Sengkang and Punggol LRTs.

 

On Sept 18, the Public Transport Council announced that it has allowed a 7% increase in public transport fares, following the annual fare review exercise. From December onwards, adult fares are expected to increase by 10 cents for up to 4.2km and 11 cents for distances beyond that. The hike is the highest increase recorded since and is the first exercise after the council adjusted its fare formula in April to factor in inflation and changing consumer patterns.

 

CGS-CIMB&rsquo s analyst Ong Khang Chuen remains neutral on the fare hike as the mechanism &ldquo essentially functions to allow SBS Transit [and] CDG to pass on the higher costs albeit at a lagged basis&rdquo , he tells The Edge Singapore.

 

While the higher fares could lift CDG&rsquo s revenue, the impact on its bottom line will be more muted as the cost base &mdash fuel and manpower &mdash will continue to grow in tandem in 2024, he adds.

 

That said, the recovery of SBS&rsquo s rail ridership should contribute positively to CDG&rsquo s overall figures. The segment is also likely to achieve profitability by 2HFY2023, notes Ong.

 

Thanks to the overall earnings growth, there is room for CDG to pay out higher dividends per share (DPS) in FY2024, says Ong, who has kept his &ldquo add&rdquo call and target price unchanged at $1.47.

 

PhillipCapital&rsquo s analyst Paul Chew, while similarly positive on the move, also sees a limited direct impact on CDG&rsquo s bottom line following the fare hike. The hike is to reflect the higher costs for electricity fees and wages and is not meant to increase margins for CDG and SBS, says Chew. &ldquo For buses, the company is paid on a fixed fee per kilometre, with cost pass through,&rdquo he tells The Edge Singapore.

 

Instead, the upside for CDG in FY2024 is expected to come from its UK bus operations, thanks to the higher operating fees it can collect. Higher margins from its taxi business and higher volumes from its rail operations could also help raise dividends for FY2024, reasons Chew, who is keeping his &ldquo buy&rdquo call and $1.57 target price for now.

 

DBS and Maybank more bullish on CDG&rsquo s prospects

 

Meanwhile, the team at DBS Group Research and Maybank Securities&rsquo analyst Eric Ong are more bullish about CDG&rsquo s prospects, with DBS noting that the 7% fare hike is higher than their expectations of a 3% hike in FY2024.

 

With the hikes, both DBS and Maybank&rsquo s Ong estimate that SBS is likely to see a $20.9 million increase in its annual revenue. Of that sum, the company will have to contribute 15% of the expected increase towards the public transport fund. &ldquo We estimate that SBS will see a bottom line improvement of $14.7 million, which will translate to $11 million at CDG level [with] all else constant,&rdquo writes the DBS team.

 

With all things equal, Ong also sees CDG reaping an additional contribution of $11 million or over 5% to the group&rsquo s overall earnings in FY2024.

 

In its Sept 19 update, DBS believes that the hike will allow SBS&rsquo s train systems to achieve profitability in FY2024, especially considering that its average daily rail ridership for August reached its pre-Covid-19 levels. The higher number of rail riders should &ldquo allay [the] market&rsquo s scepticism that ridership will not return to pre-Covid due to work-from-home phenomenon,&rdquo says DBS.

 

DBS notes that the previous fare hike for 2023 was just 2.9%, significantly below the maximum allowable quantum of 13.5%. &ldquo This was likely to tame high inflation and weak economy expected in 2023, which turned out as expected. For 2024, a significantly higher allowable fare hike of 7% is likely a signal of the government&rsquo s outlook of easing inflation and improved economic conditions such that commuters are better positioned to absorb the higher fare increases,&rdquo DBS surmises.

 

Overall, the DBS team sees that the fare hike is a &ldquo positive development&rdquo as it allows CDG to reduce its reliance on support from the government. The move also signals a &ldquo path to higher margins with further high fare hikes in the cards should the economy remain sound&rdquo .

 

Maybank&rsquo s Ong sees that the hike will have a &ldquo slightly positive impact&rdquo on CDG&rsquo s share price. The larger-than-expected hike itself could &ldquo potentially continue with the Public Transport Council again deferring a bulk (remaining 15.6%) of the fare adjustment quantum to future fare review exercises,&rdquo he says.

 

However, in spite of the fare hike, SBS&rsquo s trains will continue to face inflationary pressure from a tight labour market and higher energy prices in the near-term.

 

On dividends, Ong sees CDG maintaining its payout ratio of 70% to 80% of its patmi in FY2024.

 

DBS has kept its &ldquo buy&rdquo call with an unchanged target price of $1.65, which is the highest among its peers so far.

 

Ong has also kept its &ldquo buy&rdquo call with an unchanged target price of $1.50.

 

RHB increases TP to $1.46

 

RHB Bank Singapore&rsquo s analyst Shekhar Jaiswal has kept his &ldquo buy&rdquo call with a higher target price of $1.46 from $1.40 previously.

 

&ldquo The 7% fare increase and additional subsidy support from the government should enable SBS Transit to cover the rise in operating costs and help report a slightly better profit in FY2024. This should boost CDG&rsquo s FY2024 - FY2025 profit by 3%,&rdquo he writes.

 

As it is, SBS&rsquo s rail business has already reversed from its $51 million loss in FY2021 to a small profit of $1.2 million in the 1HFY2023 largely on the back of &ldquo rapid improvements&rdquo in its ridership, the analyst notes.

 

Year-to-date (ytd), Jaiswal points out that SBS&rsquo s rail ridership is now only 4% below its pre-Covid-19 level, offering limited upside to ridership levels in 2024.

 

Overall, the analyst maintains that CDG should report continuing improvement in profit thanks to higher overseas public transport earnings, marginally higher rail ridership in Singapore and better taxi earnings.

 

&ldquo Its strong yield should also provide good support for its share price,&rdquo he writes.

Singapore Telecommunications' Z74 0.00% (Singtel&rsquo s) sale of a 20% stake in its regional data centre business to Kohlberg Kravis Roberts & Co (KKR) for $1.1 billion is the latest move by the telco to unlock value of its infrastructure and assets while recycling capital to fund new growth. The transaction implies the regional data centre (RDC) business to have a value of $5.5 billion and 31x FY2024 EV/Ebitda.

 

Under terms of the deal announced on Sept 18, KKR also has the option to increase its stake in this business to 25% by 2027 at a pre-agreed valuation. Funding from KKR, as Singtel&rsquo s new strategic partner, will be committed on a progressive basis over three years to help speed up the expansion of the RDC across Asean and to also provide Singtel with more flexibility on how to monetise this business down the road.

 

Singtel&rsquo s regional data centre business is part of the Digital InfraCo unit which was formed in June. In addition to 62MW of existing capacity in Singapore, Singtel is building a new 58MW data centre at Tuas. The telco has also partnered Telkom and Medco Power in Indonesia and Gulf and AIS in Thailand to develop data centres in Batam and Bangkok respectively. Come 2025, Singtel&rsquo s regional data centre portfolio will have a total capacity of over 155MW, with room to scale up to more than 200MW.

 

Bill Chang, CEO of Singtel&rsquo s Digital InfraCo, says: &ldquo Our expertise in designing, building and operating data centres, and our connectivity leadership in the region, together with KKR&rsquo s strong track record in supporting digital infrastructure assets and its platform-building expertise makes for a powerful combination.&rdquo

 

KKR not only brings funding to the table and helps illuminate the latent value of these assets but it also had the expertise and global network that Singtel can benefit from.

 

Asked if Singtel might consider spinning off the data centres for its own listing, CFO Arthur Lang says that with KKR on board, Singtel will have more ways to unlock value. &ldquo That could be bringing in another minority investor or an IPO where we still own the majority. There are various options and it is something probably too early to talk about,&rdquo says Lang.

 

Upbeat views

 

Meanwhile, analysts have largely maintained their upbeat views following this latest news. UOB Kay Hian&rsquo s Chong Lee Len and Llelleythan Tan note there is minimal near-term earnings impact and have thus maintained their &ldquo buy&rdquo call and $3.15 target price. However, with the transaction, Singtel has unlocked $2 billion out of $6 billion of latent value. &ldquo The cash proceeds would be used for future expansion and may lead to special or higher dividends,&rdquo say Chong and Tan.

 

They note that in 2021, KKR acquired CyrusOne, a much larger and stable global data centre operator, at 25x EV/Ebitda. &ldquo This underscores the quality of Singtel&rsquo s regional data centre portfolio and growth potential,&rdquo say the UOB Kay Hian analysts.

 

&ldquo We view the growth capital by KKR positively to drive the next leg of Singtel&rsquo s regional data centre business with partial value unlocking of the latter&rsquo s unique infrastructure assets at a good premium,&rdquo says the RHB Bank Singapore&rsquo s research team, which has kept its &ldquo buy&rdquo call and $3.40 target price following the announcement.

 

Down the road, they estimate another $4 billion in capital could be recycled, leading to higher dividends. &ldquo Given the group&rsquo s strong balance sheet (over $3 billion cash hoard as at 1QFY2024), debt headroom and excess cash ($2 billion) after the payment of 5G capex and spectrum, we see scope for further additional/special dividends (over and above the ordinary payout of 60%&ndash 80% of group core earnings),&rdquo says the research team.

 

The $5.5 billion valuation that is implied in this deal is about 60% higher than the $3.4 billion estimated by DBS Group Research, which calculates that the news will add some $2 billion to Singtel&rsquo s total fair value. &ldquo Singtel is trading at an attractive 45% holding company discount possibly due to a slower recovery at Optus Australia, which is hurt by high inflation in the country, although the recovery is still intact with tariff hikes undertaken in late July 2023,&rdquo says DBS, which is also expecting dividends to increase over the next three years. DBS has a &ldquo buy&rdquo call and $3.18 target price.

 

Kenneth Tan and Lim Siew Khee of CGS-CIMB Research observe that the implied transaction multiple of 31x is higher than global peers&rsquo range of 20&ndash 25x EV/Ebitda but the deal, in their view, is fair. However, they note that contributions from Singtel&rsquo s data centres in Thailand and Indonesia, with a total of 91 MW, are not consolidated given they are 35%-owned associates, and Singtel&rsquo s RDC FY2023&ndash 2026 ebitda growth is likely stronger versus peers given its almost doubling of capacity in Singapore to 120MW by 2025, according to Tan and Lim, who have kept their &ldquo add&rdquo call and $2.80 target price

Singapore Telecommunications' Z74 0.00% (Singtel&rsquo s) sale of a 20% stake in its regional data centre business to Kohlberg Kravis Roberts & Co (KKR) for $1.1 billion is the latest move by the telco to unlock value of its infrastructure and assets while recycling capital to fund new growth. The transaction implies the regional data centre (RDC) business to have a value of $5.5 billion and 31x FY2024 EV/Ebitda.

 

Under terms of the deal announced on Sept 18, KKR also has the option to increase its stake in this business to 25% by 2027 at a pre-agreed valuation. Funding from KKR, as Singtel&rsquo s new strategic partner, will be committed on a progressive basis over three years to help speed up the expansion of the RDC across Asean and to also provide Singtel with more flexibility on how to monetise this business down the road.

 

Singtel&rsquo s regional data centre business is part of the Digital InfraCo unit which was formed in June. In addition to 62MW of existing capacity in Singapore, Singtel is building a new 58MW data centre at Tuas. The telco has also partnered Telkom and Medco Power in Indonesia and Gulf and AIS in Thailand to develop data centres in Batam and Bangkok respectively. Come 2025, Singtel&rsquo s regional data centre portfolio will have a total capacity of over 155MW, with room to scale up to more than 200MW.

 

Bill Chang, CEO of Singtel&rsquo s Digital InfraCo, says: &ldquo Our expertise in designing, building and operating data centres, and our connectivity leadership in the region, together with KKR&rsquo s strong track record in supporting digital infrastructure assets and its platform-building expertise makes for a powerful combination.&rdquo

 

KKR not only brings funding to the table and helps illuminate the latent value of these assets but it also had the expertise and global network that Singtel can benefit from.

 

Asked if Singtel might consider spinning off the data centres for its own listing, CFO Arthur Lang says that with KKR on board, Singtel will have more ways to unlock value. &ldquo That could be bringing in another minority investor or an IPO where we still own the majority. There are various options and it is something probably too early to talk about,&rdquo says Lang.

 

Upbeat views

 

Meanwhile, analysts have largely maintained their upbeat views following this latest news. UOB Kay Hian&rsquo s Chong Lee Len and Llelleythan Tan note there is minimal near-term earnings impact and have thus maintained their &ldquo buy&rdquo call and $3.15 target price. However, with the transaction, Singtel has unlocked $2 billion out of $6 billion of latent value. &ldquo The cash proceeds would be used for future expansion and may lead to special or higher dividends,&rdquo say Chong and Tan.

 

They note that in 2021, KKR acquired CyrusOne, a much larger and stable global data centre operator, at 25x EV/Ebitda. &ldquo This underscores the quality of Singtel&rsquo s regional data centre portfolio and growth potential,&rdquo say the UOB Kay Hian analysts.

 

&ldquo We view the growth capital by KKR positively to drive the next leg of Singtel&rsquo s regional data centre business with partial value unlocking of the latter&rsquo s unique infrastructure assets at a good premium,&rdquo says the RHB Bank Singapore&rsquo s research team, which has kept its &ldquo buy&rdquo call and $3.40 target price following the announcement.

 

Down the road, they estimate another $4 billion in capital could be recycled, leading to higher dividends. &ldquo Given the group&rsquo s strong balance sheet (over $3 billion cash hoard as at 1QFY2024), debt headroom and excess cash ($2 billion) after the payment of 5G capex and spectrum, we see scope for further additional/special dividends (over and above the ordinary payout of 60%&ndash 80% of group core earnings),&rdquo says the research team.

 

The $5.5 billion valuation that is implied in this deal is about 60% higher than the $3.4 billion estimated by DBS Group Research, which calculates that the news will add some $2 billion to Singtel&rsquo s total fair value. &ldquo Singtel is trading at an attractive 45% holding company discount possibly due to a slower recovery at Optus Australia, which is hurt by high inflation in the country, although the recovery is still intact with tariff hikes undertaken in late July 2023,&rdquo says DBS, which is also expecting dividends to increase over the next three years. DBS has a &ldquo buy&rdquo call and $3.18 target price.

 

Kenneth Tan and Lim Siew Khee of CGS-CIMB Research observe that the implied transaction multiple of 31x is higher than global peers&rsquo range of 20&ndash 25x EV/Ebitda but the deal, in their view, is fair. However, they note that contributions from Singtel&rsquo s data centres in Thailand and Indonesia, with a total of 91 MW, are not consolidated given they are 35%-owned associates, and Singtel&rsquo s RDC FY2023&ndash 2026 ebitda growth is likely stronger versus peers given its almost doubling of capacity in Singapore to 120MW by 2025, according to Tan and Lim, who have kept their &ldquo add&rdquo call and $2.80 target price

 

Singapore Telecommunications (Singtel) Z74 0.00% has agreed to sell 20% of its regional data centre business to global investment firm KKR.

 

The stake will be acquired through a fund managed by Kohlberg Kravis Roberts & Co. L.P. (KKR) where it will commit up to $1.1 billion in cash.

 

The investment puts the enterprise value of Singtel&rsquo s overall regional data centre business at $5.5 billion, around 60% higher than the $3.4 billion estimate by DBS Group Research

 

KKR will have the option to increase its stake to 25% by 2027 at the pre-agreed valuation.

 

This is the first collaboration between Singtel and KKR. According to the telco, it will be able to tap on KKR&rsquo s expertise investing in data centres and telecommunication infrastructure globally in addition to capital. KKR itself is making this investment as part of its Asia infrastructure strategy.

 

The proceeds from the transaction will go towards the expansion of the regional data centre business across Asean markets including Singapore, Indonesia and Thailand. It will also go towards exploring markets like Malaysia and others.

 

Singtel&rsquo s regional data centre business is part of the Digital InfraCo unit which was formed in June. The telco is one of the largest data centre operators in Singapore.

 

In addition to 62MW of existing capacity in Singapore, Singtel is building a new 58MW DC Tuas in Singapore and has also partnered Telkom and Medco Power in Indonesia and GULF and AIS in Thailand to develop data centres in Batam and Bangkok respectively. The data centre portfolio will deliver a total combined capacity of over 155MW once the three new projects are operational in 2025, with room to scale up to more than 200MW.

 

&ldquo KKR' s investment underscores the quality of our data centre portfolio and confidence in our plans to scale the business by capitalising on the digitalisation and rapid AI adoption that is transforming this region. Our expertise in designing, building and operating data centres, and our connectivity leadership in the region, together with KKR' s strong track record in supporting digital infrastructure assets and its platform-building expertise makes for a powerful combination. We look forward to building on the strong momentum we have achieved to grow the business into one of the region' s leading green and sustainable data centre platforms with rich hyper-connectivity services,&rdquo says Bill Chang, CEO of Singtel&rsquo s Digital InfraCo.

 

&ldquo The data centre industry is growing at an accelerated pace given the unprecedented industry trends we are witnessing. KKR is a highly credible partner in the data centre space and we look forward to our strategic partnership in scaling up the platform to become a meaningful growth engine for Singtel. The investment by KKR crystallises the latent value of our data centre assets and we hope this illuminates value for our shareholders in the coming months. With more than $6 billion being unlocked since we embarked on our strategic reset two years ago, we continue to focus on unlocking value for our shareholders,&rdquo says Arthur Lang, group CFO at Singtel.

 

&ldquo We are pleased to provide this tailored solution to support the regional data centre platform of Singtel, one of the most longstanding and distinguished corporations in Singapore and a leading digital infrastructure provider in Asia Pacific. Robust digital infrastructure, including high-quality data centres, will play a crucial role in enabling Southeast Asia&rsquo s flourishing digital economy, and Singapore is well-placed to serve as a central hub for the region. We look forward to working closely with Bill, Arthur and Singtel&rsquo s talented team to meet this tremendous demand, and sharing our global expertise and network to accelerate the platform&rsquo s growth across the region,&rdquo says David Luboff, partner and head of Asia Pacific Infrastructure at KKR.

 

The data centre market in Southeast Asia is expected to grow by 17% over the next five years compared to 12% for the rest of the world. Some US$9 billion ($12.27 billion) to US$13 billion in investments is projected to flow into the region.

 

According to Singtel, demand for data centres is expected to outpace supply due to higher data consumption, enterprises transitioning to the cloud and the rapid rise of artificial intelligence (AI) in the region.

 

Malaysia, Indonesia and Thailand could see the biggest increase in capacity with Johor, in particular, benefitting from spill-over demand from Singapore due to the island state&rsquo s supply constraints. The growing need to handle high performance computing tasks such as generative AI will also spur a significant growth in graphics processing units (GPU)-powered data centres in the years to come.

 

The unaudited net assets of Singtel' s regional data centre business as of June 30 was approximately $19 million.

 

The transaction is expected to be completed by the fourth quarter of 2023.

 

The investment puts the enterprise value of Singtel&rsquo s overall regional data centre business at S$5.5 billion. 

GLOBAL investment firm KKR will commit up to S$1.1 billion for a 20 per cent stake in Singtel&rsquo s regional data centre business.

 

In a media briefing on Monday (Sep 18), Singtel said the move will give the telco access to a wider network of global customers. It also hopes to tap KKR&rsquo s network of companies that develop new data centre cooling technologies.

 

Stellar Asia Holdings II, a fund managed by KKR, has entered into an agreement with Singtel : Z74 +0.42% for the investment in ST Dynamo Investment, the holding company for Singtel&rsquo s regional data centre (RDC) business.

 

This investment puts the enterprise value of Singtel&rsquo s overall RDC business at S$5.5 billion. KKR will also have the option to increase its stake to 25 per cent by 2027 at the pre-agreed valuation.

 

Chief executive officer of Singtel&rsquo s newly formed Digital InfraCo unit, Bill Chang, said that the deal gives the company the opportunity to serve global clients through a concept similar to the Star Alliance in the aviation industry.

 

&ldquo It&rsquo s not just a financial investment. We obviously want partners that bring value, create value jointly with us and, very importantly, are aligned to our vision,&rdquo he said, noting that KKR has data centre assets in the US and Europe.

 

Aside from this &ldquo multiplier effect&rdquo , Chang said that the company will also be able to tap KKR&rsquo s stable of data centre cooling solutions providers.

 

For instance, KKR acquired CoolIT Systems, a liquid cooling solutions provider, in May this year. Its patented technologies aim to increase server density in data centres by providing more effective cooling, and with less energy and water consumed.

 

&ldquo With the advent and the acceleration of AI, it&rsquo s going to require new cooling technologies,&rdquo Chang said.

 

He also said that the company will not consider selling any more than the 25 per cent stake in the RDC business for now, as it believes in the long-term growth potential of the business.

 

Group chief financial officer Arthur Lang noted that the data centre business is capital intensive and that having this line of capital from KKR gives the company the ability to grow its portfolio fast.

 

He added that there could be options in the future where Singtel lists the Digital InfraCo business through an initial public offering, in which the company continues to hold a majority stake.

 

&ldquo I think this is something (that) is probably too early to talk about, but I think the key for us now is to keep our options open,&rdquo he said.

 

Singtel&rsquo s RDC business is part of the Digital InfraCo unit that was formed in June this year. It currently holds other businesses as well, such as its subsea cable and satellite carrier businesses, as well as its 5G multi-edge compute business.

 

In addition to 62 MW of existing capacity here, Singtel is building a new 58 MW data centre in Tuas in Singapore. It has also partnered Telkom and Medco Power in Indonesia, and Gulf and AIS in Thailand to develop data centres in Batam and Bangkok, respectively.

 

When all three projects are built, the portfolio will have a total capacity of 155 MW.

 

The transaction is expected to be completed by the fourth quarter of 2023, subject to regulatory approvals and customary closing conditions, said KKR and Singtel.

 

The deal gives Singtel the option to draw down capital up to S$1.1 billion from KKR, and KKR&rsquo s shareholding will rise proportionately to the draw-down in capital.

 

DBS Group Research analysts noted in a report that they had valued Singtel&rsquo s RDC business conservatively at S$3.4 billion, which is 20 times the estimated earnings before interest, tax, depreciation and amortisation (Ebitda) of the business.

 

KKR, on the other hand, appears to have valued the business on the higher end of the 20 to 30 times multiple for data centre players, they said.

 

Similarly, Dedi Iskandar, Asia-Pacific head of CBRE data centre solutions, advisory and transaction, said that the valuation of the RDC business is &ldquo considered as high but justifiable in Asia-Pacific context considering the prime location of the current and future assets in the portfolio&rdquo .

 

He noted that recent data centre transactions between both Malaysia&rsquo s Time and Hong Kong&rsquo s PCCW with digital infrastructure investment firm DigitalBridge in 2022 and 2021 respectively, were completed at valuations of over 30 times Ebitda.

 

While global mergers and acquisitions (M& A) activity hit its lowest point in a decade in the first quarter of this year due to market uncertainties, Iskandar said demand for data centre capacity is still increasing as the market for cloud services grows.

 

&ldquo Building and operating data centres to meet this demand requires significant amounts of capital. Investors will continue to show interest in the data centre sector through M& A and capital markets transactions this year, seeking exposure to this growth opportunity.&rdquo

 

DBS further expects that the company&rsquo s stock price could rise 4 to 5 per cent based on the news.

 

&ldquo Singtel current market cap is S$39.6 billion versus our fair valuation of S$53 billion. This transaction has a potential to add S$2 billion or 4 per cent to its fair value.&rdquo

 

The market is also likely to expect a higher total annual dividend per share of 14.9 Singapore cents, at about 6.4 per cent yield, said DBS.