SingTel – CIMB
Downside risk to our conservative forecast
SingTel warned that 2QFY09 EBITDA will be affected by S$27m in Singapore and A$44m in Australia from subsiding 170,000 iPhones. SingTel also said that the weaker regional currencies will impact SingTel’s results, and Telkomsel’s September quarter results were below expectations.
Approximately S$67m in currency translation gain will be reported, which arose from SingTel Australia Investment reducing it’s A$ denominated share capital by A$249m in 2QFY09. The gain is the difference between the amount of share capital returned by SAI and the historical cost of investment in S$.
2% pt EBITDA impact in 2QFY09.
While we were not surprised at the profit warning as our forecast is already below SingTel’s earlier guidance, the quantum of subsidy was a surprise. We had warned of a disappointing 2QFY09 results on iPhone-related expenses in Singapore and weak associate contributions. We estimate an EBITDA impact S$82m based on the average S$/A$ exchange rate in 3Q08, which works out to be about 2% of SingTel’s FY09 EBITDA margin and 1.6% of net profit, or 7% of 2QFY09 EBITDA and 6.5% of net profit.
2Q09 net profit expected to decline qoq. Based on the above disclosure and Telkomsel’s 3Q08 results, we now think SingTel’s 2QFY08 core net profit may fall about 5-7% qoq or 11-13% yoy to S$800m-820m vs our previous estimate of flattish qoq or $870m-900m. This is on the back of a 0.6% qoq decline in revenue to about S$3.75bn and 2% pts qoq decline in EBITDA margin.
Downside risk to earnings estimate. We think there is downside risk to our alreadyconservative forecast. Our FY09 and FY10 forecast is 10% and 13% below consensus, due lower assumptions for Singapore, Australia and regional currencies/associate contribution.
Impact on StarHub and MobileOne? Based on the above data, we estimate SingTel subsidised S$480 per iPhone on average. MobileOne (M1 SP, Outperform, Target price: $2.24) or StarHub (STH SP, Underperform, Target price: S$2.30) are expected to offer the iPhones by year end when SingTel’s exclusivity ends, and we think they will incur similar subsidies as SingTel. As such, we see further pressure on margins of both telcos thanks to higher subscriber acquisition and retention cost from the iPhone.
Valuation and recommendation
Maintain UNDERPERFORM with a SOP-based target price of $2.37. Key downside catalysts are:
• aversion towards emerging market assets which SingTel has exposure to, namely Indonesia, India and Pakistan,
• competition concerns in Singapore and Australia,
• volatile currencies, and
• earnings disappointment.
Singtel will be announcing its 2QFY09 results on 12 Nov.