SingTel – DBS

Headwinds from Indonesia and exchange rate movements

Story: An Indonesian district court upheld the ruling by the Indonesian competition watchdog KPPU that Temasek must divest its stake in either PT Telkomsel or PT Indosat. The court narrowed the timeframe for the sale of stake to one year from two years. In addition, a new divestment option was also offered of halving both stakes within one year.

Point: We continue to hold the view that if Temasek were forced to divest, Indosat is more likely to be divested due to its smaller size and the ease in seeking shareholder approval at ST Telemedia (STT). On the other hand, rather than keeping all its eggs in one basket, Temasek can also exercise the option of reducing its stake in Telkomsel and Indosat by 50% each, although seeking shareholder approval at both SingTel and STT could be an arduous task. Overall, we see more uncertainty for SingTel’s Indonesian operations.

We are also concerned by the strong Singapore dollar and weak Indian rupee. SGD reached an all time high of 30.5 INR last week, 7% above our long-term expectations of 28.5 INR. We have updated SGD/INR exchange rate to 30.0 in our model, which leads us to trim down SingTel’s FY09 and FY10 earnings estimates by 1% in both years.

Relevance: There are three key changes to our SOTP valuation : (1) Telkomsel is valued at 15x FY08 (Dec yearend) PE (prev. 18x), a 15% premium to current valuation for PT Telkom; (2) Bharti’s valuation is lowered by 5% in SGD due to the weak Indian rupee; (3) A higher holding company discount of 10% (prev. 5%) to reflect the higher risks of investments. We downgrade SingTel to HOLD with target price of S$3.98. Potential special dividends of 8-10 Scents with FY08 results and potential acquisition of MTN by Bharti are positive catalysts.

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