SingTel – CIMB

A stronger 1QFY10 expected

Telkomsel and rupiah are key drivers

SingTel is scheduled to release its 1QFY10 results on 13 Aug. 1QFY10 core net profit is projected to rise 3-5% qoq and 14-18% yoy to S$985m-1,010m, the highest quarterly figure ever, buoyed by a small rebound in Singapore and Australia, the robust performances of Telkomsel and Bharti (although below our expectations) as well as regional currencies swinging back in favour of SingTel.

Some recovery in Singapore. SingTel’s Singapore’s revenue should expand 2-3% qoq, on the back of higher IDD and roaming revenue. Given SingTel’s large businessderived revenue, its revenue could outpace the performances of M1 and StarHub. We expect Optus’s revenue to rebound from a seasonally weak preceding quarter.

Telkomsel had a strong quarter. Inferring from Telkom’s results, Telkomsel’s core net profit should have jumped 30-40% qoq, on the back of strong revenue growth and higher EBITDA margins. Telkomsel added 5.4% more subscribers during the quarter while its ARPU was resilient. The momentum at Bharti fizzled out with an 8% qoq decline in core net profit on the back of flat revenue and a higher effective tax. Bharti appears to be facing headwinds from rising competition.

A$ and rupiah added punch. The Indonesian rupiah continued its northern march, appreciating against the S$ by an average of 7% qoq over the quarter. The A$ appreciated 2%.

Valuation and recommendation

Take profit. Despite the strong earnings expected, we maintain our UNDERPERFORM rating and sum-of-the-parts target price of S$3.20:

• More than its parts. SingTel is trading at a premium to its sum of its parts. We note that none of its listed associates has been re-rated very sharply, except Telkomsel (via Telkom).
• Newsflow turning negative. In addition to Bharti’s disappointing results, we believe newsflow from India could turn increasingly negative. For one, the cost of 3G spectrum could be surprise on the upside given its scarcity. While we are mildly positive on Bharti’s proposed merger with MTN, the market appears more cautious. We expect more newsflow on this in the coming weeks, which could be negative for SingTel’s share price.
• Rich valuations. The implied 12-month forward rolling P/E for SingTel Singapore and Optus has surged to 16x (Figure 3). This is derived from subtracting SingTel’s market capitalisation from the sum of all its listed associates, and dividing the residual value with the projected earnings for SingTel Singapore and Optus. Except for Telkomsel (through Telkom Indonesia), SingTel’s associates have not been rerated materially over the last few months, despite the strength in SingTel’s share price.

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