SingTel – DB

Taking stock: FX, the Sing/Au valuation & the NAV discount

FX trends will hurt 3Q09 results but Buy for increasing defensiveness
The S$ appreciation against STel’s component currencies towards end-2008 will drag on the forthcoming 3Q09 results and may impact near-term sentiment. But a stronger S$ is already in our FY09e estimates and more importantly, DB expects S$ weakening from current levels against most of STel’s key currencies which will be beneficial. Furthermore, STel trades at a >10% NAV discount and with Sing / Australia at 11-12x fwd PE, we view STel as increasingly defensive. Maintain Buy.

Recent FX trends will hurt STel’s 3Q09 results but FX outlook improving
Toward end-08 the S$ appreciated significantly against the A$, Indian rupee and Indonesian rupiah which will impair the forthcoming 3Q09 results. For example, we estimate the 3Q09 translation rates would have reduced 2Q09 non-S$ contributions by approx -10%. But FY09e FX rates are trending in-line with DBe and importantly, we expect near-term S$ weakening against STel’s key currencies which will be beneficial for earnings and valuation. As such, although FX will again be in focus ahead of the 3Q09 results, the FX outlook may in fact be improving.

And STel still attractive given reduced core valuation and NAV discount
Furthermore, with Sing/Australia currently valued at 11-12x fwd PE (significantly de-rated from 2008 highs), future STel price downside appears increasingly limited – we highlight the strong inverse correlation between the SG/AU fwd PE and subsequent STel price action. In addition, STel still trades at an NAV discount which also limits downside from current levels. As such, we view STel as increasingly defensive (unlike for much of 2008) and recommend Buy.

Maintain Buy despite 3Q09 FX trends with S$3.27 target price
Our S$3.27 SOTP TP is based on S’pore S$0.88/share (DCF: 7.1% WACC, 0% g), Optus S$0.78/share (DCF: 9.6% WACC, 1% g), DB covered listed Assocs at TP, non-DB covered listed Assocs at market value and investment value for others. We have (very) slightly increased our TP to S$3.27 from S$3.23 to reflect changes to DB’s FX forecasts (some S$ weakening expected). Risks to our Buy rating include adverse FX trends, competition and an emerging market sell-off.

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