SingTel – DBS

Marked slowdown in the regional growth story

Story: Underlying net profit at S$865m was down 0.3% y-o-y and down 10% q-o-q, in line with our estimate of S$850- S$875m. However, it was 7% below the consensus estimate of S$929m.

Point: Following are the major highlights of the result. Pre-tax contribution from regional associates declined 11% yo- y to S$582m. While weak regional currencies were a major factor, weaker operating performance of Telkomsel (down 23% y-o-y due to intense competition), Globe (down 26% yo- y due to high inflation) and Warid (S$22m loss from network expansion) were other factors. Bharti and AIS performed in line with street estimates.

If not for exchange rate movement, pre-tax earnings from associates would have increased 6% y-o-y, but even then management guidance of double-digit growth in pre-tax contribution from associates appears too bullish to us. Current weakness in AUD is also something to worry about in 2QFY09.

Singapore EBITDA at S$523m, up 1.2% y-o-y was slightly above expectations while Australia EBITDA at A$494m, up 2.7% was slightly below expectations. Overall, these two markets contributed a combined EBITDA of S$1146m, up 2.6% y-o-y, inline with our expectations.

Relevance: Our FY09 earnings estimates are 4% below consensus estimates with street too bullish on regional contributions, which can potentially be downgraded with this set of result. Infact, we see downside risk to our earnings estimates, if regional currencies or AUD weaken against SGD. We maintain HOLD for SingTel with SOTP based target price of S$3.70. However, if we use current market prices (instead of target prices) of regional associates in our SOTP valuation, SingTel is worth S$3.35.

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