SingTel – CIMB

Regional boost expected in 4Q09 results

Further recovery expected in 4QFY09

SingTel is scheduled to announce its 4QFY09 results on 14 May 09. We expect its core net profit to decline 13-14% yoy to S$3.35bn-3.38bn, a little ahead of our existing forecast of S$3.32bn. We estimate a core net profit of S$850m-880m, up 1-5% qoq but down 9-12% yoy, for 4QFY09. This should take SingTel on a path of earnings recovery since results bottomed out in 2QFY09. Key characteristics are expected to be:

Economic weakness to be felt in Singapore. We expect SingTel Singapore’s revenue and PBT to be flat qoq, with weaknesses from mobile roaming and small/medium enterprises offset by robust wired and wireless broadband take-up. SingTel is likely to have gained mobile revenue market share from MobileOne, whose revenue fell 4% qoq.

Seasonal weakness in Australia. Optus’s revenue should decline 2-3% qoq, consistent with previous seasonal weakness. However, margins should improve as the impact of iPhone subsidies should have been largely felt in the previous two quarters.

Bharti may weaken, but Telkomsel should strengthen further. We expect Bharti’s profitability to come under pressure during the quarter. Reliance ratcheted up the competitive heat in India with the aggressive launch of its GSM network nationwide in Jan 09. Reliance threw in free minutes although call rates have remained on par with its competitors’.

However, the reverse is happening in Indonesia where competition is easing for Telkomsel, indicated by industry tariffs creeping back up. Average on-network and offnetwork rates rose 9% and 3% respectively between Nov 08 and Mar 09. All in, we expect Telkomsel’s core net profit to improve qoq.

Stronger regional currencies. A key momentum behind SingTel’s stronger core net profit qoq is the stronger currencies of its associates. Figure 2 shows the relevant currencies for SingTel gaining by 1-5% qoq. This was a small reversal from the sharp declines in 3QFY09.

6.9ct final dividend. We expect SingTel to maintain its absolute payouts by raising its payout ratio from 50% in FY08 to about 60% in FY09. We expect a final DPS of 6.9cts to bring the total to 12.5 cts for the year. Although FY09 core net profit is expected to be lower than FY08’s, we expect SingTel to retain its absolute DPS of 12.5cts.

Mirroring 1HFY08, SingTel paid out 5.6cts/share in 1HFY09, suggesting that payouts would be maintained. Optus’s failure to clinch the Australian NBN mandate has relieved the group of any substantial increase in capex. Our DPS estimates are backed by SingTel’s free cash flow/share of 15.4cts, 16.4cts and 19.1cts estimated for FY09-11.

Valuation and recommendation

Maintain OUTPERFORM and sum-of-the-parts target price of S$3.05. Key rerating catalysts could include qoq improvements in core net profits at its key units, strengthening regional currencies and further signs of an easing price war in India. SingTel is our top telco pick in Singapore for its exposure to high-growth telcos followed by M1 for its attractive dividend yields.

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