SingTel – DBS

Inline results, worries ahead

SingTel reported underlying net profit of S$838m (-10.1% y-o-y, +4.6% q-o-q) exactly inline with our estimate of S$835m, which we had highlighted in SingTel’s earnings preview on 30 Jan. The key variances were (i) Singapore performed slightly better than our expectations with sequential improvement in both topline and margins; (ii) Regional associate’s post-tax contribution was lower than our expectations due to worse performance of Telkomsel. While risk to associate growth has materialized already, going forward, with SingTel having the majority market share of corporate customers in Singapore, we believe that Singapore earnings could be at risk if corporate cut spending to save costs.

Tax savings on dividends resulted in sequential improvement. 3Q09 benefited from the absence of tax on dividends to be recognized from associates (S$33m tax in 2Q09F), resulting in sequential improvement in profit. We think, consensus did not factor in this tax savings, which could be the reason that consensus estimates of S$790m, seen on the Bloomberg, is lower than the actual underlying net profit. However, our FY09 and FY10 earnings estimates are 3% and 5% below consensus estimates respectively.

Lower sequential contribution from associates due to Telkomsel. Telkomsel’s post-tax contribution was down 51% y-oy and 23% q-o-q, mainly due to high competition and partly due to weaker IDR (12% y-o-y and 10% q-o-q). While we expect some improvement in Telkomsel’s contribution going forward sequentially, we do not expect Telkomsel to return to the positive growth territory, on an annual basis in FY10.

Our FY09 and FY10 estimates are 3% and 5% below consensus estimates respectively. Maintain FULLY VALUED, and SOTP-based target price of S$2.52. Key risks are (i) lower corporate spending in Singapore where SingTel has a majority market share, (ii) weak performance of associates as disposable income is impacted in their countries, (iii) lower growth for Bharti, if Rcom continues with aggressive pricing on GSM network, (iv) exchange rate risks, and (v) potentially higher capex in Australia, implying short-term funding issues.

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