SingTel – DBS

Regional associates – victims of high competition and low usage

Story: We are concerned that regional subscriber growth may not translate into earnings growth. ARPU and EBITDA margins of regional associates are under pressure, due to (i) intense competition in Indonesia, Pakistan and Bangladesh (ii) softening minutes of usage in Philippines on the back of weak economic outlook. While usage may recover with better economic outlook, high competition may continue to dent the group earnings.

Point: We want to highlight three key points.

Telkomsel earnings may continue to decline. While Telkomsel may show some improvement from 2QFY09 results, as minutes of usage (MoU) increase in response to sharp price cuts, its SGD earnings contribution is likely to decline 23% (Prev 14% decline) in FY09 and 10% (Prev 8% decline) in FY10. A part of it can be attributed to an 18% weakness in Indonesian currency (IDR). Our assumption of SGD/IDR of 7300 compared to current exchange rate of 8000 implies downside risk to our estimates. Revision in Warid, Bharti and Globe earnings. We project Warid to post losses of S$90m (Prev S$23m loss) in FY09 due to higher network rollout and borrowing costs. We project Bharti’s pretax SGD contribution to increase 1% (Prev 9%) in FY09 as a result of higher USD borrowing costs and 18% (Prev 17%) in FY10, reflecting the low base. Globe contribution could decline 10% (Prev 5% decline) in FY09 due to lower usage and grow 5% (Prev 0%) in FY10 as economy stages a recovery.

Open-ended guidance for associates. Following the 2QFY09 results, management lowered its guidance for regional associate’s pre-tax earnings contribution from “low-double digit growth” to “lower than last year”. However, the guidance did not specify whether single digit or double-digit decline. We estimate associate contribution in FY09 and FY10 could decline 15% (Prev 4%decline) and grow 6% (Prev 4%) respectively.

Relevance: We lowered our FY09 and FY10 earnings estimates by 5.1% and 5.5% respectively, which are 5% and 7% below revised street estimates respectively. 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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