SingTel – DBS

Regional Associates Take a “U” Turn

Story: Underlying net profit of S$801m (-12.4% y-o-y, -7.4% qo-q) was exactly inline with our expectations of S$800m. Assuming no forex change from 2QFY08, net profit would have declined 5% y-o-y. The result could disappoint the market, as street estimates suggest flat FY09 earnings versus our estimate of 7% decline y-o-y.

Point: We want to highlight four key points.

Singapore and Australia better than our expectations, despite adverse iPhone impact. Singapore EBITDA at S$500m was down 1.8% y-o-y only despite S$27m adverse impact of iPhone launch. Australia EBITDA at A$479m was up 0.4% y-o-y, despite A$44m adverse impact of iPhone launch.

Regional associates below our expectations. Associate contribution was down 25.5% y-o-y compared to our estimate of single digit decline. Assuming no forex change from 2QFY08, associate contribution would have been flat. What surprised us was Bharti’s pre-tax earnings contribution, down 5.1% y-o-y, against our expectations of 10% growth. SingTel has attributed the decline to S$57m fair value loss on Bharti’s foreign borrowings. We did not see this item in Bharti’s results and need to check with management on the disparity. The other associates were more or less in line with our expectations.

Maintained guidance for Singapore and Australia. Surprisingly, management maintained its guidance of EBITDA growth for Singapore and Australia. In our estimates, we have assumed Singapore EBITDA to be flat and Australia EBITDA to decline 1.5% y-o-y (AUD).

Lowered guidance for associates. Management lowered its guidance for associate pre-tax earnings contribution from “lowdouble digit growth” to “lower than last year”. In our estimates, we have assumed associate contribution to decline 3.8% y-o-y, which we think has downside risks.

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. In our view, if forex rates stay at current levels, SingTel’s FY09F earnings could be 2%-3% lower than our current projections.

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