SingTel – DBS

Cheapest telco in Singapore

• Trading at 11.6x PER, below 12.3x for MSCI Asia-Ex Japan telco services and cheaper than smaller peers StarHub and M1.
• Sharp recovery in Indonesia and stronger rupiah prompted 3%/6% upgrade of FY10F/11F earnings.
NCS is also making solid progress in Singapore.
• Upgrade to BUY with revised TP of S$3.50. Rumors of Optus re-listing, if true, could add 50 Scents to our TP.

Telkomsel should offset Bharti’s weakness. Telkomsel’s CEO Mr. Sarwoto Atmosutarno commented recently that Telkomsel’s subscriber base grew 26% y-o-y in 2009, and aims to grow that by another 14-15% in 2010. We raised our FY10F/11F (FYE March) earnings for Telkomsel by 12%/19%. We forecast SGD earnings growth of 30%/13% and 12%/-10% for Telkomsel and Bharti in FY10F/11F. Telkomsel earnings should offset potential S$85m drop to Bharti’s earnings contribution in FY11F, in our view.

Optus re-listing could add 50 Scents. The Wall Street Journal reported on 14 Jan that the sale of 25% stake in Optus is likely to raise A$4bn; SingTel declined to comment. If true, this could add 50 Scents to SingTel’s valuation. We estimate Optus’ market value at A$9b-11b, but SingTel might secure premium valuation for Optus, based on a higher dividend yield; similar to Maxis’ IPO. A much stronger AUD/SGD exchange rate of 1.25 is also favorable. In fact, SingTel could consider special dividends from Optus re-listing proceeds if it cannot find right acquisition targets, in our view.

Upgrade to BUY. SingTel is trading at 11.7x FY11F PER compared to StarHub’s 12.7x and M1’s 12.2x, despite a diversified business model and better growth prospects. Our earnings revision prompts higher SOTP valuation from Telkomsel (better outlook) and Optus (AUD/SGD) rate).

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