SingTel – DBS

No more premium valuations for Bharti

Story: While Bharti should continue to be the main growth driver for SingTel, we do not advocate premium valuations for Bharti due to the onset of new competition and adverse regulatory actions in India.

Point: Our key concerns are: (1) Average number of players in each circle is set to increase to twelve in the next year from around four now, as a result of new licenses issued in Jan 08. The Indian Govt. intends to bring tariffs 50% down from its current levels, which we think can be achieved in a time span of two to three years. (2) Nationwide mobile number portability (MNP), scheduled in June 09, provides an excellent opportunity for new entrants to gain market share. (3) 3G is likely to be delayed to 2009, which could come as a disappointment to operators, short on the spectrum. (4) A likely increase in spectrum fee could place more burden on the operators who need spectrum the most.

Relevance: We have lowered Bharti’s FY10 earnings estimates by 6%, which reduces SingTel’s FY10 earnings estimates by 2.5%. Our FY09 and FY10 estimates are 3.4% and 3.3% below the consensus estimates respectively, as market appears to have overestimated associates contribution. We have lowered our DCF valuation (WACC 11%, terminal growth 3%) for Bharti to Rs.1030, which is down 14% from Rs.1200 earlier and translates to reasonably high 23 x FY09 PER and 13.3x FY09 EBITDA. We maintain HOLD for SingTel with our new SOTP based target price of S$3.75.

We see single digit earnings growth ahead for SingTel and believe that management is under pressure to invest in emerging markets to deliver on its guidance of doubledigit growth in earnings in the medium term (5-7 years).

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