SingTel – DBS

Focus on the “Home Ground”

• Singapore and Optus EBITDA improved sequentially in 4Q09 despite weak macro
• We expect Singapore to continue to grow its data and mobile business, while Optus might benefit from an improved competitive environment in Australia.
• Our revised FY10F-FY11F earnings are 4%-6% above consensus. Maintain BUY with target price of S$3.05.

Managed service, IT projects and mobile business to drive Singapore growth. SingTel launched various packages focusing on cost savings for SMEs in the last quarter, which should help to drive growth from the managed service business. In the conference call, management also hinted that it expects large IT government projects in the current year. In the mobile segment, SingTel has significantly increased its market share in the last couple of quarters. Going forwards, even if ARPU declines from lower usage, SingTel’s bottom-line stands to benefit from recently acquired subscribers, whose acquisition costs have been expensed off in the recent quarters already.

Margins may rebound back in Australia. Optus witnessed healthy margins across its various segments in 4Q09. We believe that subsequent to the Hutch-Vodafone merger, Optus margins can start to trend north as Hutch-Vodafone focuses on enhancing its low margins. Management’s guidance of low single digit growth in revenue and EBITDA, despite official forecast of 1% yoy contraction in Aussie economy in 2009, also points in the same direction. We expect 25% EBITDA margins in FY10F versus 24.8% margins in FY09A.

Further rebound in regional currencies is the key catalyst. In the past one-month Indonesian rupiah and Aussie dollar have strengthened 7-10% versus SGD. Indian rupee is still weak but any rebound could be earnings accretive for SingTel. We maintain BUY with SOTP based target price of S$3.05.

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