SingTel – OCBC
Most negatives priced in
Recent sell-down brings value. SingTel, hit by concerns about the slowing growth prospects of its associates and the adverse forex impact on its earnings, was among one of the biggest losers among the telcos during the October sell-off. The stock lost about 25.2% of its value in that month alone, while M1 lost about 28.6%, StarHub about 7.8%, versus the STI’s 23.9% tumble. Although SingTel recovered slightly in November, it is still down over 38% Year-to-Date (YTD), bringing its valuation down to around 12.3x FY10F PER, which is below its 5-year average of 13.4x. In the aftermath of the sell-down, we believe that most of the negatives have been factored in.
Forex remains main concern. Nevertheless, we see the still-volatile forex swings as the main risk to SingTel’s earnings, given that it derives a significant portion of its earnings from overseas. Optus accounts for nearly 66% of 2Q09 revenue and associates account for 43% of its 2Q09 pre-tax earnings. In its recent 2Q09 results, adverse forex movements led to a 16.8% YoY and 8.9% QoQ fall in net contributions from associates. However, we note that forex impacts can also be positive, should the regional currencies strengthen against the SGD. In any case, SingTel has slashed the guidance for associates from low double-digit growth to lower overall YoY pre-tax contributions, citing slower economic growth in the countries as well as working into the lower guidance from key associates like Telkomsel as well as losses from Warid.
More cautious regional expansion strategy. In view of the more uncertain global economic outlook and the relatively tight credit market, we believe that SingTel may adopt a more cautious approach to its regional expansion strategy. By doing so, we see a higher chance of a special dividend – this was something that SingTel has consistently done in the past to return excess cash to shareholders. However, it is unlikely to be large as SingTel may need to conserve cash for its higher capex spending on the Next Generation National Broadband Network (NBN). It may also need to set aside cash in case Optus is successfully in its bid to build the NBN-equivalent in Australia. Maintain BUY with S$3.09 fair value.