SingTel – DBS

Opportunity to redeploy capital?

• We believe there are avenues to free up capital in Australia and Singapore, which can be redeployed in more attractive opportunities such as Bharti.

• Reversal of pricing downtrend in Indonesia and rise in regional currencies lead to 4% earnings revision.

• Consensus numbers are 4% below our revised FY10FFY11F earnings. Maintain BUY with revised SOTP based TP of S$3.22

Opportunities to free up capital in Singapore and Australia. We believe SingTel has multiple alternatives in Australia – to sell Optus’ fixed network and/or list Optus on the stock exchange, which is more stable now as a result of healthier competitive environment post Hutch-Vodafone merger. We believe that SingTel also has an option of spinning off its IT subsidiary, NCS and re-list on the stock exchange in the long term. We assign higher probability to the sale of Optus fixed line network in the near term. We estimate that the potential sale of Optus fixed Network, listing of Optus and NCS can free up over S$1.5 bn, S$6-8 bn and over S$1 bn of capital respectively. If freed up capital can be redeployed in better opportunities, the stock may warrant re-rating.

Strategic rationale for higher investment in Bharti. SingTel may not want to see its stake diluted in Bharti post Bharti-MTN deal. This would require S$5-6b investment from SingTel and provide investors an exposure to the emerging markets of Africa, through tried and tested partner Bharti. We believe that Bharti can further enhance MTN’s profitability, by transferring its “minutes factory” business model.

Recovering Telkomsel leads to 2% revision in FY10F earnings. Recently, Excelcom has taken-off its super off-peak free on-net call offerings while Telkomsel has extended the number of chargeable minutes during peak hour call. As such, we believe that pricing downtrend is set to reverse in Indonesia.

Surging regional currencies lead to another 2% revision. Since our last SingTel update on 15 May, Aussie dollar, Indian rupee and Indonesian rupiah have strengthened 2-4% versus Singapore dollar.

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