SingTel – DBS

Worse than expected Telkomsel results and weak Singapore, Australia

Story: SingTel could report 2QFY09F net underlying profit of S$800m (-13% y-o-y, -8% q-o-q) on Nov 12. Full year street estimates suggest that the market is expecting flat to single digit earnings growth. So a 13% earnings decline could trigger a series of earnings downgrades on the street.

Point: We wish to highlight three key points.

Major disappointment from Telkomsel. Compared to our expectations of single-digit earnings growth, Telkomsel reported a 20% y-o-y drop in 3Q08 earnings in its pursuit of market share. This coupled with a weak IDR (down 8%) imply that its earnings contribution would fall 25% y-o-y. We now estimate overall associate contribution would fall 5% y-o-y in 2QFY09F, instead of registering 3% growth.

Our FY09F and FY10F earnings are 12-16% below consensus. As per management iPhone launch has an adverse impact on 2QFY09 EBITDA of S$27m in Singapore and A$44m in Australia. Overall, we lower our FY09 and FY10 group earnings by 3.4% and 5.1% respectively.

Downside risk to earnings if forex situation does not improve. Every 10% decline in the AUD, INR or IDR should lower group earnings by c.2% each. Our analysis indicates if forex rates stay at current levels, SingTel’s FY09F earnings could be 2%-3% lower than our current projections.

Relevance: Downgrade to FULLY VALUED, with SOTP-based revised target price of S$2.34. We lower our valuation for Telkomsel and use current market prices for listed associates instead of target prices in view of potential earnings disappointments. We advise investors to accumulate SingTel towards our trough valuation of S$2.02.

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