SingTel – CIMB

Strong operational turnaround

• A little ahead of expectation. Annualised 9MFY09 core net profit was 1% above ours and 2% below consensus due to stronger-than-expected performance at SingTel Singapore and Optus. 3QFY09 core net profit rose 5% qoq but fell 10% yoy to S$838m, ahead of our expectation of S$760m-790m. Key takeaways:

• Strong operational turnaround. Revenues in local currency at both SingTel Singapore and Optus surged 13% qoq and 6% qoq respectively on the back of strong subscriber growth. The 19% qoq decline in the A$ resulted in a 14% qoq dilution in revenue in S$ terms for Optus. Group EBITDA margin rose 1.2%-pts after very weak margin in 2QFY09 when subscriber acquisition and retention costs (SARC) surged due to iPhone subsidies. We believe their aggressive subscriber acquisition efforts of previous quarters are bearing fruits with revenues kicking in.

• Associates weighed down by “fair value losses”. Associate contribution rose nudged 5% qoq due to: 1) the 10% and 5% qoq depreciation of the Indonesian rupiah and Indian rupee against the S$; and 2) fair value losses of S$28m by Telkomsel from foreign currency denominated vendor payables as a result of the weaker rupiah, and S$21m by Bharti on its US$ and Yen denominated borrowings.

• Guidance maintained. SingTel maintained its guidance, which we view positively as it signals no further deterioration in outlook.

• Neutral on industry consolidation in Australia. We are neutral on the consolidation of Vodafone and Hutchison Australia on Optus. While a larger and stronger operator will emerge, it removes an aggressive fourth player (Hutchison) which had been price-disruptive from the market.

• Maintain OUTPERFORM on SingTel with a SOP-based target price of S$3.10 on the operational improvement/turnaround in Singapore and Australia, stabilising regional currencies, strong qoq results among its key units, namely Telkomsel and Bharti.

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