SingTel – CIMB
Weighed down by India
Post-results conference call
Maintain Underperform. We came away with our views unchanged on SingTel following its 3QFY10 results conference call. SingTel indicated that the commercial launch of NGNBN would likely be delayed to early 2H10 from April, but that it would continue to benefit as a contractor building the network. SingTel was non-committal on any potential capital management and we do not think it will happen at the end of
FY10. We raise our FY10-12 earnings estimates by 2-4% to account for a lower effective tax but maintain our sum-of-the-parts target price of S$3.30. SingTel remains an UNDERPERFORM as stiff competition and the auction for 3G spectrum in India coupled with prospects of intensifying competition in Australia loom over the stock. While its 3QFY10 performance was fairly strong, it was bolstered by a strong A$ which is now giving back some of its gains and a one-off tax credit in Singapore. We prefer M1 (Outperform, TP: S$ 2.07) for its potential capital management and benefits from NGNBN.
Non-committal over capital management and Optus IPO. As usual, SingTel was vague about its capital-management plans despite a fall in its net debt/annualized EBITDA to below 0.9x and below its target of 1.5-2x. SingTel wants to have the financial flexibility to pursue growth and will review its cash levels if there are no imminent acquisitions. While its 3QFY10 net debt/annualised had drifted down to 0.85x and substantially below its target, we believe it is unlikely to declare anything substantial at end-FY10 because financial markets remain volatile, especially with concerns over sovereign debt defaults in Europe. SingTel had in the past returned 10-15 cts/share in dividends or capital when its net debt/annualised EBITDA fell to 0.8x. However, capital management at end-2010 is more likely as gearing continues to fall and financial markets normalise. SingTel was equally vague about its rumoured plans to list Optus and said it will consider anything that is value-accretive.
Still Asia-focused. SingTel reiterated that it remains focused on acquiring assets in the Asia Pacific and regions such as the Middle East and Africa. However, it added that it will be acquiring new capabilities to maximise the value of its existing assets. We believe this includes stimulating wireless broadband take-up and multimedia services among its emerging associates.
Loss-leader strategy for mioTV. SingTel does not operate mioTV as a standalone business because mioTV is meant to help raise ARPUs for its broadband business and help SingTel make the transition from carriage provider to a multimedia service provider. We interpret this as SingTel positioning mioTV as a loss leader and will continue to be aggressive in acquiring content. This spells bad news for StarHub (Underperform, TP: S$2.14), in our view.
Likely delay in launch of NGNBN. SingTel indicated that commercial launch of NGNBN is likely to be delayed to early 2H10 from April, but the penalty for this will not be significant. No reasons were given for the delay and it expects the regulator to make an announcement on this.
Benefiting from rollout of NGNBN. With the rollout of the NGNBN in progress, SingTel is benefiting as a contractor via its IT units. While Open Net (the operating company) has not issued any capex guidance, SingTel indicated that Open Net’s capex should peak in 2010, which would be positive for SingTel. SingTel’s 3QFY10 IT and Engineering revenue jumped 13% qoq and contributed to a modest 7% of group revenue.
EBITDA guidance maintained. Optus reaffirmed its single-digit EBITDA guidance for FY10 despite its: 1) strong push for market share in mobile which would inevitably sacrifice margins; 2) 4Q09 strength; and 3) 9M10 yoy EBITDA growth of only 4%, as it expects 4QFY10 to be seasonally stronger.
Slowing on-net fixed broadband but strong wireless broadband. Optus’s on-net fixed broadband net adds had moderated to 8K in 3Q from the 25K-33K in the past few quarters because of competition and the somewhat substitutable but mainly complementary effects of wireless broadband. On the positive side, wireless broadband net adds were still healthy as Optus added 111K in 3Q vs. the 100K-104K net adds seen in past quarters.
Fixed-line strategy. Optus reiterated its three-pronged fixed-line strategy: 1) focus on its on-net business where it is upgrading its HFC network in Melbourne and Brisbane; 2) concentrate on driving costs down; and 3) preparing for NBN. Efforts have paid off with its business and wholesale EBITDA margins raised from the high teens to the mid-20s in 3QFY10, and EBITDA margins rising to 15% in consumer and SMB from 13% a year ago. It has also captured a 20% market share in areas where it has network coverage.
Of spectrum, LTE and NBN. The recent acquisition of 10 MHz of paired spectrum in 2100 MHz in eight capital cities would help to improve the quality and capacity of its network and help it cope with wireless broadband traffic. While it is running LTE trials currently, it does not see spectrum availability or the necessary devices and applications before 2012. Finally, on NBN, it is providing data and input for wholesale pricing and hopes for competitive access terms that would provide the best cost to taxpayers. It also hopes that any cash payment paid to the incumbent for use of passive infrastructure or copper assets would be made visible and transparent.
Valuation and recommendation
Raising forecasts on lower tax assumptions. We have raised our FY10-12 core net profit estimates by 2-4% to account for a lower-than-expected effective tax, especially in FY10. This is due to tax credits from a lower statutory tax rate in Singapore from 18% to 17% this year. We have assumed higher FY11-12 core net profit estimates after lowering our effective tax for its associates, based on YTD trends. However, our sum-of-the-parts target price of S$3.30 is unchanged as our earnings revisions are minor. SingTel remains an UNDERPERFORM as we believe intense competition in India coupled with prospects of a heated 3G spectrum is likely to weigh on stock sentiment. Also, competition in Australia could intensify with Vodafone Hutchison Australia looking to unseat Optus for the second spot. While its 3QFY10 performance was fairly strong, it was bolstered by a strong A$ which is now giving back some of its gains and a one-off tax credit in Singapore. Switch to M1 (Outperform, TP: S$ 2.07) for its potential capital management and benefits from NGNBN.