Singtel shares surged 5.84 percent to S$3.26 by 10:36 A.M. SGT after reports on Wednesday that TPG Telecom was in merger talks with Vodafone Hutchison Australia, a move which could ease competition pressures.
The news spurred Daiwa to upgrade Singtel shares to Outperform from Hold.
“While the talks are at an exploratory stage, they nonetheless raise the likelihood of a less severe competitive landscape in Australia,” Daiwa said, noting that news of TPG’s plans to enter the Australia and Singapore markets, which emerged in 2016, had spurred tariff reductions as incumbents braced for more competition.
“A successful M&A would imply Singtel having to deal with one less competitor in Australia, which we believe is a positive catalyst in the short term,” Daiwa said. “Overall, we believe the short-term outlook for Singtel appears to have brightened as Australia accounts of 25 percent of our sum-of-the-parts valuation.”
But it added that the potential merger’s implications for Singapore and TPG’s imminent entry into that market weren’t as certain.
“There are no indications that TPG Telecom’s aspirations are off the table. However, the negotiations itself suggest rational, return-seeking
behavior on the part of TPG, which lowers the odds for an aggressive, disruptive market entry, in our view,” Daiwa said.
Daiwa noted that Singtel’s medium-term picture was still “clouded,” with Indonesia and India market fundamentals still challenging and as investments in digital and cyber-security businesses yet to pay off. It also noted that after a potential TPG-VHA merger, the combined entity could off “a more formidable challenge to Optus” after a few years.
The stock’s recent around 7 percent selloff has left it appearing oversold, even with weak fiscal first quarter results, Daiwa said. It kept an unchanged S$3.47 target price.
Singtel reported earlier this month that its fiscal first quarter net profit fell 6.6 percent on-year to S$832 million, due to a year-earlier exceptional gain and amid headwinds in Indian and Indonesian operations.