SingTel – DBS

At a Glance

• Underlying net profit of S$945m was 3.5% below our expectations despite double digit y-o-y revenue growth in Singapore and Australia (in local currency terms)
• Optus EBITDA margins slipped 5 % points q-o-q in A$ terms due to higher iPhone activations/ recontracts but should recoup profits from higher ARPU in later quarters
• No change in estimates – maintain HOLD.

Comment on Results

Underlying net profit of S$945m (+10.3% yoy, -1.5% qoq) for 1Q10 was slightly below our expectations but largely in line with consensus. The key variance was lower-than-expected profits from Optus. In spite of a 4.5% sequential increase in revenue (A$ terms), Optus EBITDA declined 13.6% q-o-q to A$505m and net profit declined 28.1% q-o-q to A$139m. This was attributed to seasonality as well as higher customer acquisition costs associated with a q-o-q increase of approximately 50% in iPhone activations during the quarter.

The Singapore business was helped by contribution from SCS and fibre rollout revenue from OpenNet. EBITDA margins stayed stable at 41.8%, and operational EBITDA was up 10.6% to S$578m, in line with revenue. Associates’ contribution was in line, with underlying net profit contribution of S$497m up 14% y-o-y and 19% q-o-q. Strong earnings recovery at Telkomsel, coupled with fair value gains on currency at Telkomsel and Bharti – as highlighted in our results preview piece – were the key earnings drivers.

Recommendation

Management, while noting the challenging operating environment, reiterated its guidance at the beginning of the year – namely, single digit revenue and flat earnings growth in Singapore, single digit revenue and EBITDA growth for Optus and growth from regional associates Bharti and Telkomsel in local currency terms.

While Optus earnings were affected by customer acquisition costs in 1Q, we expect the company to recoup profits from higher iPhone ARPU (about 1.5x normal customer ARPU) in later quarters. Hence, we keep our EPS estimates intact and continue to maintain our HOLD call.

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