DBS Vickers: Singapore Telecommunications - 15 Apr 2008

Associate setback but potential special dividends

Story: SingTel’s upcoming 4QFY08 results will be clouded by a strong Singapore dollar and not-so strong performance of Indonesian associate Telkomsel. We expect SingTel to complement its regular dividend with a special dividend to be announced with 4QFY08 results.

Point: Three issues surrounding SingTel are (i) concerns of strong appreciation of SGD against the Indian rupee that could impact earnings and valuation contribution of its Indian associate - Bharti in terms of SGD; (ii) significant reduction in tariff of Indonesian associate Telkomsel that
could lower its earnings contribution; and (iii) SingTel potentially paying 8-10 cents in special dividends on top of the 6.5 cents regular dividend with 4QFY08 results.

Relevance: We trimmed our pre-exceptional estimates for FY08F and FY09F by 1.4% and 3.7%, respectively. Overall, net profit for FY08F is unchanged due to S$155m exceptional income (evident in 9M08 results) compared to our assumption of S$100m. SingTel remains a BUY with a new sum-of-parts (SOP) based valuation of S$4.35 (prev. S$4.50) due to lower contribution from Telkomsel and Bharti.

Highlights
Stronger SGD could have adverse impact. The SGD has appreciated 7% against INR in the last three months to 1 SGD:29.4 INR, which would lower earnings and valuation of Bharti in SGD terms. Similarly, the SGD has appreciated by about 2% against the AUD in the last 3 months to 1 SGD:0.79 AUD. Due to Singapore’s focus on containing inflation, we expect the SGD to remain strong in the foreseeable future. However, the SGD had not appreciated meaningfully against the strong Indonesian, Philippines and Thailand currencies. Overall, we lowered SingTel’s FY08F and FY09F earnings by 0.6% and 1.3%, respectively, due to exchange rate movements.

Strong price competition in Indonesia will impact Telkomsel's earnings. Our checks indicate that Telkomsel has reduced its tarrifs by over 15% on average in the last quarter, which led us to trim its contribution to SingTels FY09F (Mar year end) earnings by 9%, keeping in mind elasticity due to higher subscriber growth. Now we expect Telkomsel’s contribution to grow by 10% in FY09F instead of 20%. While the largest impact will be on FY09F earnings, some of it could also be captured in SingTel’s 4QFY08 results. On the other hand, AIS (booking of interconnection fee) and Globe (strong subscriber growth) should offset some of the weakness. Overall, we lowered SingTel’s FY08F and FY09F earnings by 0.8% and 2.4%, respectively, due to lower associate contribution.

Potential special dividends of 8-10 cents with FY08F results. SingTel has utilized some of its cash in the acquisition of Warid Telecom (c. S$1.1 b). The company also benefited from higher dividend payout by its associates of S$1.0b (+72% yoy) in 9M08. We estimate FY08F net debt/EBITDA ratio at 1.1x, which is still below the target ratio of 1.5x. As such, we expect management to declare a special dividend of 8-10 cents per share on top of the final dividend of 6.5 cents. Our projection for special dividend is based on last year’s special dividend of 9.5 cents.

In terms of post-tax earnings contribution, Telkomsel and Bharti contributed about 23% and 20% of total group earnings in 9MFY08, with regional associates accounting for about 53% of total earnings. On the other hand, Singapore and Australia contributed about 30% and 17% of total group earnings respectively.

Bharti (due to exchange rate) and Telkomsel (due to lower growth) contribute less to SingTel’s valuation now than previously, while SingTel & Optus contributed slightly more as valuation is rolled over to FY09F. We used 5% holdings company discount here. However, if we use current price (instead of target price) of Bharti (Rs 805), Globe (PHP 1455), AIS (THB 98) and Telkomsel (16x FY08) in our SOP valuation, SingTel would be worth S$3.72.