SingTel – CIMB

3QFY10 results preview

A stronger quarter

Bolstered by Telkomsel and A$; but maintain Underperform. We do not expect any surprises from SingTel’s 3QFY10 results, which are scheduled for release on 9 Feb. Core net profit should grow 1-4% qoq on higher contributions from Telkomsel and a stronger A$, despite seasonally higher subscriber acquisition costs (SAC) in Singapore and Australia, and weaker contributions from Bharti due to stiff competition in India. Core net profit should be 14-18% higher yoy because of a low base a year ago as regional currencies plunged. We maintain UNDERPERFORM on SingTel, with an intact sum-of-the-parts target price of S$3.30. We see de-rating catalysts from stiff competition and a likely heated auction for 3G spectrum in India, high content costs in Singapore and potentially rising competition in Australia.

The details

We expect SingTel’s 3QFY10 core net profit to be S$960m-990m, up 1-4% qoq and 14-18% yoy due to higher contributions from Telkomsel and a stronger A$. This is consistent with consensus expectations of S$970m. The qoq strength would defy seasonally higher subscriber acquisition costs in Singapore and Australia, and weaker contributions from Bharti. The strong yoy growth would reflect a low base due to a plunge in the A$ and rupiah. Results are scheduled for release on 9 Feb.

Seasonally higher SACs. We expect SingTel Singapore and Optus’s EBITDA margins to remain depressed by higher SACs from year-end festivities. M1’s 4Q09 EBITDA margins shed 3% pts qoq respectively. SingTel’s 2QFY10 margins were weighed down by subsidies for the iPhone 3GS. SingTel Singapore and Optus should contribute an estimated 29% and 22% respectively to group FY10 PBT.

Further weakness from Bharti; Telkomsel to improve. The performance of India’s largest cellco, which contributes about 20% to group PBT, was weighed down again by tough competition. Core net profit plunged 14% qoq and 13% yoy and will drag down SingTel’s overall results. The impact would be partially blunted by SingTel’s higher stake in Bharti during the quarter from 30.4% to 32%. However, we anticipate a stronger performance from Telkomsel on the back of easing competition in Indonesia and higher effective tariffs.

Currencies in SingTel’s favour. Regional currencies continued their march north, favouring SingTel. The A$ and rupiah strengthened 5% qoq and 2% respectively against the S$, while the Indian rupee weakened 2% during the quarter.

Issues to watch out for. During its results conference call, we will look forward to greater clarity on the impact of the cost of broadcasting the Barclays Premier League exclusively on SingTel, plans (if any) to launch its own OpCo under the Next Generation National Broadband Network (NGNBN), and its rumoured plans to list Optus. We will also be watching for further signs of competition in the residential and commercial broadband/data space ahead of the launch of NGNBN in Singapore.

Valuation and recommendation

We reiterate our UNDERPERFORM rating on SingTel, with an unchanged sum-of-theparts target price of S$3.30. We see de-rating catalysts from intense competition in India, higher content costs in Singapore and a likely escalation in competition in Australia. The delay in India’s 3G auction process from February to August-September is a short-term relief but remains an issue.

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