SingTel – CIMB

Slowing growth in the horizon

Telkomsel de-rating + Strong S$ = hold. Telkomsel (35% associate) is poised to experience market share loss and margin erosion amidst a fierce price war in Indonesia. We do not expect a recovery in the near-term. In addition, prospects for a stronger S$ against A$ and regional currencies means foreign exchange tailwinds that SingTel enjoyed in 2007 will be missed in 2008. These two reasons drive our downgrade to Neutral.

4QFY08 preview. Expecting full year FY08 core earnings of S$3.9 bn (+6% yoy) and final DPS of 6.0 S cts. Our earnings expectation is in line with consensus estimates but believe that SingTel could surprise on the dividend front with a final DPS of 6.0 S cts, bringing full year FY08 DPS to 17.0 S cts (consensus: 13.5 S cts).

• Earnings estimates reduced. We have cut our FY09-10 earnings estimates by 6.8- 7.6%, primarily on our 8-11% earnings downgrade for Telkomsel and adjustments to currency assumptions that reflect a stronger S$ against A$ and regional currencies.

Downgrading to Neutral, sum-of-parts valuation declines to S$4.05 from S$4.45. The bulk of the valuation adjustment is due to revised assumptions for a stronger S$ and Telkomsel earnings downgrade The lack of upside catalysts for existing businesses and prospects of slower growth in FY09 underpin our Neutral call. SingTel is our top pick for the Singapore telco sector. It offers the best growth prospects, potential M&A related share price catalyst (MTN deal via Bharti) and decent recurring yield of over 4.5%.

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