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.

OCBC Research: Singapore Telecommunications - 6 Feb 2008

Affirms FY08 guidance, upgrade to BUY

Cost pressures remain in 3Q08. Singapore Telecommunications Ltd (SingTel) reported a decent set of 3Q08 results. Revenue rose 11.4% YoY (+3.9% QoQ) to S$3,825.0m, driven by revenue growth of 11% in the Singapore business and the A$ appreciation of nearly 8%, although PATMI slipped 4.2% YoY and 3.7% QoQ to S$952.3m. However, underlying profit jumped 21.7% YoY and also inched up 2.2% QoQ to S$931.4m, once we exclude the exceptional items, albeit off the 5.2% QoQ pace seen in 2Q08. Operational EBITDA rose 7.5% YoY and 1.1% QoQ to S$1,135.5m, but margins have come off further to 29.7% in 3Q08, versus 30.4% in 2Q08 and 30.8% in 3Q07, no doubt reflecting continued cost pressures in Singapore and Australia as we had expected.

Associates did better in 3Q08. In addition, we also saw good growth from its regional associates, where their collective pre-tax contribution grew 31.2% YoY and also 4.8% QoQ. This time around, the star performer was Globe Telecom in Philippines, which saw pre-tax profit surged 55.5% YoY and 14.1% QoQ to S$81.0m, boosted by both a 7% appreciation in the PHP against SGD and also robust subscriber growth. For the quarter, SingTel also saw a sharp 53% YoY (+11% QoQ) jump in its mobile subscribers to hit 171.5m, with the bulk coming from its latest investment in Pakistan's Warid Telecom. Management expects to continue to aggressively grow its network and customers there, as it is a market with low penetration rate.

Affirms its FY08 guidance. Going forward, management also affirmed its previous FY08 guidance and continues to expect revenue from Singapore to grow at single-digit rate and Australia to grow along with the market, with pre-tax earnings growth from its regional mobile business at doubledigit level. And as the 9M08 revenue of S$9,992.8m (+10.9%) already met 83.2% of our FY08 estimate and the underlying profit of S$2,712.9m (+16.3%) met 80.4% of our forecast, we are bumping up our estimates by around 4.4%. However, we have left our FY09 estimates largely unchanged, as margin compression and high acquisition/retention costs may negate subscriber growth.

Upgrade to BUY. In line with its better operational performance, we have also revised up our fair value from S$3.91 to S$4.35. As there is now nearly 11.6% upside from here, we upgrade our call to BUY.

Major Shareholder: Temasek Holdings 54.1%

DBS Vickers: Singapore Telecommunications - 5 Feb 2008

Impressive Quarter Once Again

Overall results exceed expectations. Underlying net profit of S$931m (up 22% yoy, 2% qoq) exceeded our forecast of S$912m and consensus forecast of S$907m. Besides there was exceptional income of S$21m in 3Q08. We have excluded S$84m in compensation from IDA from last year results for fair comparison.

Singapore business inline with impressive market share gains. Singapore EBITDA contribution of S$479m was in line with our expectations of S$480m. EBITDA margin of 38.7, though slightly below our expectations of 39% margin, was compensated by higher revenue growth of 11%. Continuous market share gains in mobile business were quite impressive as SingTel garnered almost 60% of the total new subscribers added in the quarter.

Australia business inline with better performance across fixed line. Optus EBITDA contribution at A$506m was (up 1% yoy, 6% qoq) in line with our expectations of S$505m. However, EBITDA was up 9% in S$ terms as A$ is up 8% yoy. Due to aggressive subscriber acquisition plans, mobile business margins were hit, which were compensated by higher margins in fixed line business from higher on-net volumes.

Regional associates above expectations mainly due to Globe Telecom. Regional associates contributed S$656m (up 30% yoy, 4% qoq) in pre-tax earnings, which is slightly higher than our expectation of S$645m. Bharti’s, Telkomsel and Globe’s contribution grew 39%, 23% and 55% yoy respectively. Globe Telecom surprised on the upside due to higher subscriber growth and data services in the festival season along with forex gains.

Healthy Outlook. Market share gains in Singapore should reflect in better margins next year. Bharti should continue to register impressive growth while Telkomsel could witness some slowdown due to lower tariffs. Maintain BUY at SOTP based target price of S$4.50.

Major Shareholder: Temasek Holdings 54.1%

CIMB-GK Securities: Singapore Telecommunications - 31 Jan 2008

Bharti’s 3QFY08 results

Beating consensus. Bharti’s (SingTel’s 30.5% associate) 3QFY08 earnings of Rs17.2bn (+42% yoy) beat consensus estimate by almost 3%. This was another strong all-round performance. Topline growth was 42% yoy as Bharti increased its market share to 23.6% (+180bp yoy). EBIT margin expanded to 27.7% (+125bp yoy) through economies of scale and operating leverage. Bharti also announced additional spectrum granted by the government in five telecom circles.

Extends lead over rivals. Bharti added 6.3m (49% more than Vodafone) wireless subscribers in 3QFY08 and extended its market lead over Vodafone and Reliance, ending the quarter with a 23.6% market share and a wireless subscriber base of 55.2m. As expected, ARPU continued to slide (-2% qoq) as Bharti continued to roll out aggressively in rural villages.

Allocated additional spectrum in five telecom circles. Bharti has received formal communication from the Department of Telecom for the allotment of additional spectrum in West Bengal, Gujarat, Uttar Pradesh (west), Assam and Haryana. Bharti is expecting additional spectrum in another five circles (Rajasthan, Andhra Pradesh, Karnataka, Bihar and Tamil Nadu) in a couple of months.

Monetising Infratel and sharing of tower assets. Bharti has sold an 8-10% stake in Infratel to eight leading international investors for US$1bn, valuing Infratel’s assets at US$10bn-12.5bn. Separately, Infratel has formed a JV (TowerCo) with Vodafone and Idea last month to share tower assets. The rational for the exercise is to reduce the capex burden. FY09 capex is forecast to decline to US$2.5bn from US$3.3bn-3.5bn in FY08.

Comments

This strong set of results should dispel rising concerns over Bharti’s growth prospects, e.g. threat of competition from Vodafone and Reliance, spectrum shortage. Bharti continues to prove its unrivalled advantages in branding, distribution network and economies of scale.

We are positive on the tower-sharing strategy as we expect benefits to outweigh risks for Bharti. Firstly, Bharti will have a reduced capex burden and enlarged coverage. Secondly, we believe Bharti stands to win more subscribers than it will lose from tower-sharing given its strengths in branding and distribution network.

Valuation and recommendation

Maintain Outperform on SingTel with unchanged sum-of-the-parts target price of S$4.55. SingTel’s reliable earnings growth remains intact, in our view, with Bharti’s strong showing. Bharti is the key earnings driver at SingTel, contributing 20% to its underlying earnings. In addition, SingTel’s 5.3% YTD outperformance relative to Bharti supports our view that SingTel offers lower risk exposure to the earnings growth of regional mobile operators in an environment of heightened risk aversion.