SingTel – CIMB
Bharti’s 2QFY09 results
SingTel’s 30.5% associate Bharti’s 1HFY09 net profit of Rs40.7bn (+30.% yoy) came in within consensus estimates but was below ours (See Figure 2 overleaf). The result made up 44% of our full year forecast compared to 47% of consensus. That said, Bharti turned in a fairly strong performance as 1HFY09 revenue increased by 43% yoy on the back of robust subscriber growth of 58.5% yoy. The result was affected by forex loss of Rs5.8bn in the quarter (vs Rs1.5bn in 1Q) and a deferred tax income from a tax holiday of Rs3bn. Stripping that out, net profit would have grown 7.3% qoq and 41.3% yoy.
Revenue growth upwards. Bharti’s strategy of targeting rural users is paying off with steadily rising net adds. Bharti has been capturing a larger proportion of subscribers and extending its market share leadership to 24.6% (+0.4% pts qoq, +1.2% pts yoy), according to TRAI statistics (Figure 1). It captured 29.6% of net adds in Aug, the highest in the industry, compared with Reliance at 19.7% and Vodafone at 20.1%. This has helped it add 8m subscribers in the quarter – a record. This is a run rate that management believes is sustainable as the incremental subscribers are coming from small towns across the nation.
EBITDA margins impacted slightly. EBITDA margins came off slightly (-1.8% pts yoy, -0.5% pts qoq) due to higher network cost. This is attributed to the increase in network sites and the greater volume of consumption of diesel particularly as they pushed into rural areas where obtaining electricity to sites becomes a more drawn out process.
Competition and slower economy are surmountable. Bharti believes that new entrants, be it new or existing operators, would have difficulty in breaking in the market as tariffs are low and have little room to fall, branding would need to be built up and economies of scale are lacking. Although slowing economic growth and inflation is a concern, Bharti opines that telcos services are a substitute for travel. Mobile services are needed in rural areas where infrastructure is lacking and transportation is expensive.
Passive infrastructure. The passive infrastructure business recorded an EBITDA margin of 33.3% for 2Q vs. 36.6% in 1Q. It is in talks to sign up more tenants; Vodafone is already signed up and Idea is in the final stages. There are also ongoing talks with Telenor and Bharti is likely to sign them up given that much of their business model rests on sharing of towers. It has transferred 35,000 towers to Indus while keeping 24,000 towers on Infratel. Bharti highlighted that the listing of Infratel or Indus would only occur after 2 years (Mar 2010) once they have established themselves.
Other updates. Management noted that it had received new spectrum for 3 circles (Tamil Nadu, Bihar and Karnataka), which should alleviate congestion pressures. It has applied for more spectrum in 6 more circles. Bharti added that its Sri Lanka rollout was on track and should launch later on in the year. The recent DTH service launch in 62 cities has been encouraging thus far. It also turned free cash flow positive in the quarter, the first time it has done so.
Valuation and recommendation
Strong execution at Bharti. Bharti continues to deliver and extract profits from first time users in rural and poorer users. Subscriber momentum continues apace as its branding pull and economies of scale are clear advantages in a hyper-competitive market. We continue to view Bharti as one of the more reliable growth driver at SingTel. It is expected to contribute 22% to SingTel’s FY09 PBT.
Maintain earnings forecast, target price and UNDERPERFORM call. Pending the release of SingTel’s 2QFY09 results on Nov 12, we are maintaining our earnings forecast and SOP target price of S$2.37. We maintain UNDERPERFORM as we believe there could be more downside to the stock in the short term due to higher risk aversion towards emerging market assets and volatile currencies. However, we see value emerging over the longer term. Telecom is a resilient business, and SingTel’s key subsidiaries and associates have conservative balance sheets and generate free cash flows.