SingTel – Kim Eng

Breathing A Little Easier

Lower revenue/profits expected but better margins
SingTel will be reporting 3QFY09 results on 10 Feb. We expect underlying net profit to decline 15% yoy to $792m on the back of a 4% yoy (5% qoq) decline in revenue to $3681m. However, EBITDA margin is expected to rise 1 percentage point qoq to 28.7% while share of associates’ profits is expected to be flat qoq but down 28% yoy.

Margins should rebound as rivalry eases
Group EBITDA margin should have improved qoq following the sharp decline in 2Q09, which was caused by launch costs and hefty subsidies for the Apple iPhone. In Singapore, competition had also noticeably retreated after 4-5 quarters of intense market share grab that caused EBITDA margin to fall from 31% in 1Q08 to 27.7% in 2Q09.

Associates expected to be lower in general
Associates had a mixed performance during the quarter. Bharti did very well (3Q09 sales +7%, PBT +25% qoq) as the Indian market remained immune to the economic crisis. Globe reported a very strong 4Q08 saleswise (5% qoq) as it benefited from strong demand for data and broadband, but reported a 15% qoq drop in profit due to higher expenses.

Currencies stabilising but impact still negative in 3Q09
Currencies in general have been less volatile than in the past few quarters. Still, the average value of the Australian dollar, Indonesian rupiah and Indian rupee depreciated 18%, 12% and 5% during the quarter, impacting Optus, Bharti and Telkomsel. They account for roughly 60% of PBT. AIS and Globe contributions however should flow through without any forex muddying of the waters.

Maintain BUY recommendation with $2.88 target
We maintain our BUY call on SingTel with a blended DDM/SOTP target of $2.88. Potential catalysts include potential currency appreciation in future as the worst of the crisis newsflow appears to have passed. In addition, a benign competitive landscape in Singapore could draw attention to SingTel’s defensive business and decent dividend yield.

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