SingTel – DBS

Strong results, weak dividends and slow growth ahead

Comment on Results

Excluding IDA compensation of S$84m last year, underlying net profit of S$968m was up 9.2% y-o-y and better than our and consensus expectations of S$905m. The group had an exceptional gain of S$153m from the sale of Bharti’s minority stake in a subsidiary. The company announced a final dividend of 6.9 cents; fell short of our expectations of 15 cents (6.5 cents regular and 8.5 cents in special dividends)

Singapore operations better than expected. Singapore’s operational EBITDA at S$469m was up 0.8% and 5% above our EBITDA estimate of S$448m. While revenue growth was much higher at 11% due to significant market share win in the mobile segment, EBITDA margin declined to 36.4% from 40.3% last year.

Optus inline. Optus’ operational EBITDA at A$538m was up 2.7% and inline with our estimates. Revenue growth was slightly slow at 4.5% while EBITDA margin at 27.8% was inline.

Associates contribution inline. Associate pre-tax contribution at S$646m was up 19% and inline with our estimates. As expected Bharti delivered 41% growth in contribution at S$222m. AIS also delivered 55% growth in contribution at S$76m,mainly due to recognition of S$20m interconnection income. Telkomsel clearly slowing down with 6.4% growth only.

Tax was lower than expected. Tax of S$290m was lower than our estimate of S$311m as we had assumed higher tax rate of 23% compared with tax rate of only 20.9% for 4Q08.

Recommendation

Management guiding for single digit growth in mature markets. Management is guiding for (1) mid-single digit growth in revenue for Singapore with stable EBITDA margins around 40%, capex rising to mid-teens level of revenue because of mobile capacity expansion and upgrade for fixed lines (2) Single digit growth in revenues for Optus and EBITDA expected to grow inline with revenues, capex at midteen levels of revenue (3) Associate earnings to grow at double digit, albeit slower than last two years due to increased competition in Indonesia and higher losses at Warid. (4) Dividend payout ratio 45- 60% up from 40%.

Single digit growth in FY09. We see 3% growth in EBITDA for Singapore and Optus and 14% growth (versus 24% in FY08) in associate contribution for FY09. Overall, we see 8% growth in group’s earnings in FY09 and maintain HOLD at TP of S$3.98.

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