SingTel – CIMB
Weak 3Q Bharti results
Bharti’s 3QFY10 results
Maintain Underperform. SingTel’s Indian associate, Bharti, turned in relatively weak 3QFY10 results although the results fell in line with consensus forecast (75% of full year). Our numbers are based on consensus. 3Q was marked by a rather tepid topline, weak MOUs, high churns and lower margins due to intense price competition. While Bharti expects competition to stabilise in 2H10, we are less sanguine and believe the competitive phase will persist throughout the most part of 2010. We retain our earnings forecasts, sum-of-the-parts target price of S$3.30 and UNDERPEFORM rating on SingTel pending SingTel’s results release on 9 Feb. We are concerned about competition in India and Australia, 3G spectrum bidding in India, and an inability to recover the cost of BPL rights. Switch to M1 or Axiata.
Effect of price war telling. Bharti turned in a rather weak performance even after factoring in recent security issues when it lost over 25% subscribers who could not be re-authenticated and the prepaid ban in Jammu & Kashmir (J&K) where it has a 35% market share. 3QFY10 core net profit slipped 13% qoq and 14% yoy, on the back of a revenue drop of 1% qoq but 1% yoy growth. This was due to the effects of savage price cuts and partly due to the J&K ban despite seasonal strength. These factors also resulted in a 2.1%-pt qoq decline in EBITDA margins.
Wireless metrics affected. The intense competition had manifested itself in the wireless business which fell 2% qoq, despite a healthy 8% qoq rise in net adds to more than 8m. ARPUs fell 9% qoq, while MOU declined 1% (would have been flat if not for the J&K ban), leading to a steep 8% fall in average revenue per minute (ARPM) to Rs0.52 in 3Q.
2H10 to be better? Bharti sees a more stable environment in 2H10 with hypercompetitiveness culminating in the launches of several new players in the next 5-6 months and as new entrants begin to realise the non-viability of their business models following losses over 2-4 quarters. We anticipate the start-up of three telcos in the coming months. During this period, Bharti will focus on increasing its subscriber and revenue market share and stabilising its margins.
We are less sanguine and believe that the competitive phase will prevail throughout most of 2010 as the new entrants would have a long term view, backed by strong parents. Hyper competition in Bangladesh, Indonesia, Pakistan and Sri Lanka took 12-18 months to play out, based on our observation. In India, the intense competition was sparked off in Sep 09. On the positive side, any relaxation in M&A norms would accelerate the consolidation process, we believe.
Elasticity to recover? Bharti presented a more upbeat picture on elasticity, noting that it had arrested the erosion in its MOU and that not all of the elasticity had been reflected as it was still in the process of migrating its customers to new pricing plans.
Bangladesh, Sri Lanka and international acquisitions. Bharti is excited over its acquisition of a 70% stake in Warid Bangladesh as it sees this as a promising market with a low tele-density of 32% and a fairly large population of 160m. It is still formulating its strategy there but believes it has the potential to capture market leadership in the next few years. In Sri Lanka, Bharti has moved to the fourth slot from the fifth after one quarter of operation and now covers the southern and eastern parts of the country and will be present almost everywhere soon. Bharti remains committed to its international aspirations, particularly as it has completed its South Asian footprint. It has formed a dedicated business to pursue opportunities in emerging markets, for the next phase of growth.
Valuation and recommendation
Maintaining earnings forecasts, target price and UNDERPERFORM rating. We make no changes to our forecasts, sum-of-the-parts target price of S$3.30 and UNDERPERFORM rating pending SingTel’s results release on 9 Feb. We see potential de-rating catalysts from rising competition in India and Australia, an upcoming 3G spectrum auction in India which should be hotly contested, and an inability to recover the high cost of BPL.
Switch to M1 (Outperform, TP: S$2.07) which is our top Singapore telco pick for its capital-management potential or Axiata (Outperform, TP: RM3.86) for its fast-growing regional telco exposure.