SingTel – DBS

One more associate disappoints

Story: Globe Telecom’s 3Q08 net profit declined 22% y-o-y, which is significantly lower than our expectations of flat earnings. This is third consecutive quarterly disappointment from Globe, whose 9M08 profit has declined 9% yoy. We understand that Globe’s earnings are under pressure due to lower phone use among subscribers and intense competition in the sector. Globe contributes about 5.6% of SingTel’s earnings. As such adverse impact on SingTel’s full year earnings would be close to 0.5%.

Point: We want to highlight two key points. Disappointing numbers even if we ignore exchange rate. We expect SingTel to report 2Q09 underlying net profit of S$800m down 13% y-o-y on 12 Nov. Except Bharti, all the regional associates, along with Singapore and Australia operations are expected to be significantly below market expectations, even if we ignore the impact of unfavorable exchange rates.

Street too bullish but downside risks can weigh more. We anticipate street to start cutting SingTel’s earnings estimates after seeing 2QFY09 disappointment. Our FY09 and FY10 numbers are 12% and 16% below consensus respectively. If forex rates stay at current levels, SingTel’s FY09F earnings could be 2%-3% lower than our current projections. Every 10% decline in the AUD, INR or IDR should lower group earnings by c.2% each.

Relevance: Maintain FULLY VALUED, with SOTP-based target price of S$2.34. We advise investors to accumulate SingTel towards our trough valuation of S$2.02.

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