SingTel – CIMB

Associate and iPhone subsidy dampener

2QFY10 results preview

We expect SingTel to register a small 0-3% qoq decline but up 14-18% yoy in 2QFY10 core net profit of about S$915m-945, which is scheduled to be released on 11 Nov 09. This is below consensus’s S$976m. The expected key features of the results are: 1) a weaker contribution from Bharti due to competition in India and interest expense at Telkomsel, despite stronger currencies; and 2) weaker margins at SingTel Singapore and Optus due to subsidies on the iPhone 3GS. The robust yoy growth is due to a low base when Singapore and Optus succumbed to higher iPhone subsidies and Telkomsel was affected by competition. All in, the results cold come below our FY10 estimate, which has downside risk due to Bharti. We maintain UNDERPERFORM on SingTel, with a SOP-based target price of S$3.10. Likely de-rating catalysts are mounting competition in India and Australia. Switch to M1 or Axiata.

The details

Bharti disappointed. SingTel’s largest associate Bharti which contributes 21% to its estimated FY10 PBT was affected by competition. For the first time in memory, Bharti’s topline contracted as it fell -1.0% on a qoq basis pulled down by a 1.6% qoq fall in mobile revenue. The ARPU reduction was particularly acute in 2Q as it shrunk 9.4% qoq, the highest level in the last three years. We think this is just the start of more bad news to come.

While Telkomsel turned in a commendable operating performance with EBITDA growing 7% qoq, this was dampened by higher interest expense as the company geared up. All in core net profit was flattish qoq.

iPhone subsidies in Australia and Singapore. We expect margins of both Optus and SingTel Singapore to come under pressure from the iPhone 3GS subsidies, which was launched in end-June and mid-July respectively. Their margins declined 2.9% pts and 2.0% pts respectively in 2QFY09 when the iPhone 3G was launched. However, we do not think their margins will be as substantially impacted by the 3GS as the pentup demand appears to be less.

Currencies in SingTel’s favour. The regional currencies generally favoured SingTel. The Aussie dollar and Indonesian rupiah strengthened 6% and 3% respectively against the Sing dollar, while the Indian rupee weakened 2% during the quarter. 

Valuation and recommendation

Maintain UNDERPERFORM despite the recent correction in its SingTel’s share price due to our concerns over its ability to recover the Barclays Premier League cost and the rising competition within both India and Australia. We maintain our earnings forecast for SingTel until the release of its 2Q results but we are likely to cut our it for Bharti due to mounting competition. There is no change to SingTel’s SOP-based target price of S$3.10 for now. M1 remains our top Singapore telco pick. For regional exposure, we prefer Axiata.

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