SingTel – OCBC
Growth to be constrained by S$ strength. SingTel’s regional associates have been its key driving force. Going into 2008, besides Bharti and possibly Telkomsel, we do not expect its other mobile associates to see strong growth. Even with Bharti and Telkomsel, the appreciating S$ could mean that their growth impact on SingTel is likely to be diluted. There is also the risk that SingTel might have to divest its stake in Telkomsel in the event that the dispute between Temasek Holdings and the Indonesian anticompetition body is not resolved amicably.
Nationalism against sovereign fund is negative on SingTel. Previously, one of SingTel’s key strengths was its strong parentage. However, in the current nationalistic sentiment against sovereign companies/fund, SingTel’s association with Temasek Holdings could be a disadvantage. This is particularly negative for SingTel as one of its key growth drivers has been its ability to identify and acquire undervalued mobile telcos. In the current climate, SingTel could potentially be disallowed to bid for any future regional telcos, and even if permitted, the stake is likely to be as a minority thus constraining its future growth.
Singapore to see margin compression. In the domestic front, SingTel is fighting many battles. It is trying to regain mobile market share (especially on the pre-paid segment) via attractive promotions. SingTel has also launched Mio pay TV with an equally aggressive campaign that undercut its rival and we also see it likely to embark on a “bid to win” strategy on NBN. In terms of financial impact, all these initiatives are likely stretch SingTel, and could possibly result in margin compression.
Maintain HOLD. Even though we see SingTel’s generous dividend as fairly defensive, in the current volatile market condition, our preference is predictability of earnings and maintenance of status quo. In that respect, its earnings growth is likely to face many challenges (as highlighted above both on the macro and micro fronts). The net effect of these challenges
happening at about the same time is that its earnings growth could be capped. We thus maintain our S$3.91 fair value estimate and our HOLD rating.