SingTel – DMG

Earnings drag

Below expectations. In the second quarter to 30 Sep 08, revenue increased 5.3% to S$3.89b while underlying net profit slid 12.3% to S$801m. The bottom line came in below our expectations due to a confluence of negative factors – high acquisition and marketing costs for the iPhone 3G initiative, weaker regional currencies, lower earnings from Indonesia’s Telekomsel resulting from price competition and post-tax loss from Pakistan-based Warid Telecom. Taking away the impact of the depreciation in Australia and regional currencies, SingTel would have registered a fall of 5% in earnings, which would still have been lower than
our estimates.

Free cash flow and balance sheet still robust. Free cash flow inched up 1.1% to S$1.14b, with S$195m coming from Singapore, S$316m from Australia and S$629m from regional associates. Balance sheet strength remains. It has a net gearing of 26% and a Net debt/EBITDA of 1.1x.

Mobile numbers continue to grow. The Group’s customer base hit 216.7m, rising 37% YoY and 10% QoQ. Its six regional associates saw increases in their mobile clients by between 15-59%, with Bharti (+8.1m to 77.5m subscribers) and Telekomsel (+8.1m to 60.5m) leading the charge. There were also cheers for the Singapore operations on this front as it saw the biggest growth in recent years for its post-paid business. It had quarterly net adds of 76,000, thanks to aggressive marketing campaigns as well as strong take-up of iPhone 3G. With another 45,000 increase in pre-paid customers, SingTel Singapore grew its base to 2.9m, extending its lead with a market share of 45.9%. It was 44.7% a quarter ago and 40.3% a year ago.

iPhone, the margin muncher. Given that mobile subscriber acquisition and retention costs are expensed immediately upon activation, the iPhone 3G initiative had a dilutive impact on earnings and margins, hitting EBITDA by S$27m in Singapore and A$44m in Australia, which was in line with management’s guidance last week. EBITDA margins would have been 2.6ppt higher at 40.1% (against a reported 37.5%) in Singapore and 3.0ppt higher at 26.2% (23.2%) in Australia.

Regional business takes a big knock. The regional associates slumped 26% to S$461m as they fell victim to declining currencies vis-à-vis S$, as well as weaker performances from Telekomsel, Warid and Globe. Stripping off currency changes, the combined operations of the regionals would have been 16% lower. The associates have a considerable impact on the Group, given that they now account for 41% of Group EBITDA. Including the 31% contribution from Optus, SingTel’s overseas operations account for a significant 73% of EBITDA.

No more clear blue skies. SingTel expects its core markets in Singapore and Optus to grow its revenue and EBITDA. But the weaker A$ will have an adverse impact on the earnings for the Group. What will hit it further is the lacklustre performance of its regional associates. Telekomsel, in particular, saw pre-tax profit slump 40% (in S$ terms) to S$113m. In our recent note where we downgraded SingTel, we had anticipated the associates’ to grow 3% in FY09, down from our earlier target of 9% growth. However, we are now expecting the associates’ contribution to be 15% lower compared to a year ago.

Earnings downgraded. As a result of the revised outlook, we have lowered our earnings by 9.5% from S$3.81b to S$3.45b (-12.3% YoY) in FY09 and 9.9% from S$4.12b to S$3.71b (+7.6% YoY) in FY10. We have also reduced our sum-of-theparts valuation from S$2.80 to S$2.67, mainly due to the bleaker forecast for its associates. Maintain NEUTRAL.

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