SingTel more expensive than Bharti?

Story: We expect SingTel to report underlying net profit of S$835m (down 10% y-o-y, up 4% q-o-q) on 10th of February, which could be slightly lower than consensus estimates. In our view, tax savings rather than associate growth would drive the sequential growth. In 2Q09, SingTel paid $33m in tax on dividends from associates but in 3Q09F there are no dividends to be recognized from associates.

Point: We want to highlight three key points about SingTel.

Lower sequential contribution from associates. Weaker Indian rupee (down 3% q-o-q) and Indonesian rupiah (down 10% qo- q) are expected to impact earnings contributions from Bharti and Telkomsel. We do not expect Telkomsel’s contribution to recover yet as it benefited from S$22m oneoff tax adjustments in 2Q09, which would be absent in 3Q09F.

Higher sequential contribution from Singapore and Australia. 3Q09F would benefit from lower iPhone subsidy compared to 2Q09. However, Optus contribution would be impacted by weak Aussie dollar (down 20% q-o-q).

SingTel trading at premium to Bharti is unsustainable. Currently SingTel trades at 13.1x PER and 7.3x EV/EBITDA for FY10 compared to 12.5x PER and 7.0x EV/EBITDA for Bharti with 15% FY09-FY12 earnings CAGR. We believe either Bharti has to rise or SingTel has to decline for SingTel to look reasonable vis-à-vis Bharti, which is the only growth driver in SingTel’s portfolio. SingTel’s dividend yield of 4.5% is not compelling either. Regional telecom sector average under our coverage is 12.1x PER and 4.8x EV/EBITDA, implying SingTel is not cheap on valuation grounds.

Relevance: We fine-tuned our FY09 and FY10 estimates which are 3% and 6% below consensus estimates respectively. Maintain FULLY VALUED, with revised SOTP-based target price of S$2.52. Key risks are (i) Weak performance of Telkomsel, Warid and Globe as disposable income is impacted in their countries (ii) cut in corporate spending in Singapore where SingTel has majority market share (iii) Exchange rate risks (iv) Potentially higher capex in Australia, implying shortterm funding issues (v) lower growth for Bharti, if Rcom continues with aggressive pricing on GSM network.

SingTel pumps US$75m into Warid

Its shareholding in its Pakistani unit will remain at 30%

SINGAPORE Telecommunications (SingTel) has given Warid Telecom an additional capital injection of US$75 million to take its total investment in the Pakistani operator to US$833 million.

The latest capital boost came from the subscription to SingTel’s entitlement of 174.89 million Warid shares for US$75 million in cash.

Warid is expected to use this amount to fund the expansion of its domestic cellular network.

SingTel said the transaction will not have a material impact on its performance for the financial year ending March 31.

The operator bought its 30 per cent stake in Warid in 2007 for US$758 million as part of its strategy to branch into under-developed telecommunications markets around the world.

Warid is currently Pakistan’s third-largest mobile operator with a market share of around 18.8 per cent.

Despite its capital injection, SingTel’s shareholding in its Pakistani unit will stay at 30 per cent as Warid’s other shareholder, the Abu Dhabi Group, has also raised its stake significantly.

According to a Warid statement released on Wednesday, its two shareholders had recently pumped a total of US$250 million in equity into the firm.

Warid had suffered a wider-than-expected pre-tax loss of S$41 million for the three months ended Sept 30, 2008. Its underperformance, coupled with plunging regional currencies, dragged SingTel’s second-quarter net profit to a three-year quarterly low of S$868 million.

SingTel derives nearly 60 per cent of its earnings from overseas through wholly owned Australian operator Optus, along with regional associates Warid, Bharti Telecom, Telkomsel, Globe Telecom, Pacific Bangladesh Telecom and AIS.

While its foreign ventures have been the bane of its recent financial performance, some industry watchers believe the tide is finally turning in SingTel’s favour. The company’s share price has rallied as a result, rising 7 per cent in the past week to close at S$2.76 yesterday.

‘A collection of emerging market telcos, SingTel should benefit from a recovery in the currencies under which its key overseas units operate and receding aversion towards this asset class,’ CIMB said in a recent research note.

‘Also, the worst of competition in Indonesia appears to be behind Telkomsel. Bharti continues to gain market share,’ the research firm added.

SingTel will release its third-quarter results on Feb 10.