SingTel – DBS
Domestic and regional woes
Story: SingTel is facing challenges on both the domestic and regional fronts.
Point: We want to highlight four key points.
1. Possibly disappointing growth at Bharti next year. The market seems to underestimate the impact of mobile number portability (MNP), to be implemented June 2009. We trimmed our FY10F and FY11F earnings for Bharti by 5% and 6%, respectively. Using higher equity risk premium, we lowered Bharti’s target price to Rs850. Bharti remains the most expensive telco in Asia-Pacific at 16x FY09F PER.
2. Revised forex assumptions. We lowered the AUD/SGD exchange rate assumption by 10% to 1.15, and expect it to average 1.10 in 2HFY09. We raised our SGD/INR rate by 5% and expect it to average 31.5 in 2HFY09. A 10% decline in the AUD, INR or IDR would lower group earnings by c.2% each.
3. Lower corporate spending in Singapore. The slowing economy could result in businesses postponing their expansion plans. SingTel has more exposure to corporate spending relative to other local telcos. We trimmed revenue growth for Singapore to 5% (from 6% earlier) for FY09F, and to 2% (from 4%) for FY10F.
4. Impact of National Broadband Network (NBN). NBN could result in some loss of revenue from leasing of local circuits, where SingTel currently has virtual monopoly. We estimate overall loss of earnings arising from the NBN at S$100-150m, or 2-3% of group earnings in FY11 and beyond.
Relevance: We lowered our FY09F and FY10F earnings by 5.5% and 7.5%, respectively; they are now 5% and 8% below consensus estimates. Maintain HOLD for SingTel, with SOTPbased target price of S$3.10. Our stress test indicates a bear case target price of S$2.58 if associates de-rate to their historical low valuations.