SingTel – OCBC

Operationally better

Mixed results. Singapore Telecommunications Limited (SingTel) reported its 1Q08 results with revenue of S$3.6b, +10.5% YoY and +7.2% QoQ. Net profit was reported at S$927.2m, +10.4% YoY but fell 6.3% QoQ. The underlying profit (excluding one-off items) trend was similar with annual growth at +3.7% but fell 2.1% sequentially. The sequential decline in profitability is due mainly to a high base effect as the result of the recognition of tax credit in the previous quarter. Excluding this item (i.e. at the pre-tax level), SingTel’s numbers would have grown 5.0% QoQ. As in previous results, the key earnings driver remains SingTel’s regional mobile associates. This segment grew 29.0% YoY and 11.5% QoQ. In terms of the two key operating units, Singapore operations margins improved on the back of better cost control whilst the reverse is true in Australia. The overall effect is a slight deterioration of group sequential EBITDA margin to 31.3% (from 32.9% in 4Q07).

Singapore margins improved. In Singapore, even though revenue grew by marginal 0.4% QoQ to S$1,161m, this was offset by a much stronger drop in operating expenses of 6.3% QoQ. This led to EBITDA improving to S$507m, +8.9% QoQ. This is clearly reflected in the sequential margin expansion from 42.3% to 43.7%. The good cost containment was almost across all segments. However going forward, with the recent introduction of IPTV and aggressive marketing, costs are expected to rise, hence we expect the 2H08 margins to come off. In Australia, the scene is a total opposite. Revenue grew 2.5% QoQ to A$1,898m, but was offset by increases in operating expenses of 6.6% QoQ. This led to EBITDA deteriorating 8.2% QoQ, with margins falling from 28.3% to 25.4%. The reason for the poor matrix is due to aggressive acquisition activity which increased 37% QoQ to A$159/sub.

Associates retain star status. The star performers in the quarter were again SingTel’s associates. Collectively they contributed about S$463m or by about 50% to group PATMI (from 42% in 4Q07). More importantly, with the current rate of growth, the associates are likely to dominate future earnings. In terms of importance of individual associates, Telkomsel remains dominant – making up 43% of associate contribution, followed closely by Bharti (34%).

Maintain HOLD. SingTel is a fairly defensive play with generous payout and we do not expect the trend to change. As for earnings, SingTel has guided that it expects revenue and EBITDA to continue to grow. However in terms of ratings, as SingTel is trading close to fair value of S$3.32, we maintain our HOLD rating.

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