SingTel – OCBC
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.