SingTel – UOBKH

Big But Valuation Unattractive

Singapore – Dominance in corporate data eroded. SingTel dominance in corporate data services, which accounted for 25.6% of revenue from Singapore operations, will be challenged due to open access provided by Next Gen Nationwide Broadband Network (NGNBN). NGNBN provides superior performance with speed of up to 1Gbps. We believe corporate customers will be enticed by NGNBN-based services, which are likely to be more competitively priced as wholesale prices from NGNBN are fixed and transparent. The government, for example, has already decided to utilise NGNBN for a substantial portion of its requirement for telecoms services.

Australia – Optus could benefit from structural changes. The Rudd administration plans to set up a National Broadband Network (NBN) providing broadband speed of up to 100Mbps for 90% of Australians and structurally separate Telstra's wholesale network and consumer businesses. However, the government needs Telstra's cooperation and passive infrastructure to reduce the hefty cost of rolling out NBN. There is uncertainty over whether Telstra could solicit concessions from the government by cooperating on NBN. Legislative processes to reform regulations could also be protracted.

Regional mobile associates – facing headwinds. Bharti Airtel faces intense competition in India, which is expected to persist due to more new entrants, such as Telenor's Unicor and Etisalat's STEL. The impending acquisition of Zain Africa is also expensive at EV/EBITDA of 9.2x and is funded by huge additional borrowings of US$8.3b. Telkomsel faces slower growth in Indonesia while competitors Indosat and XL Axiata have been revitalised after change of controlling shareholders and revamp of management teams.

Downgrade to HOLD. We cut our earnings forecast for FY11 and FY12 by 1.9% and 3.9% respectively due to fluctuations in exchange rates and lower contributions from Bharti Airtel. We value SingTel at S$3.06 based on sum-of-the-parts, thus providing limited upside. We estimate SingTel's FY11 free cash flow yield at 6.6%, lower than 11.1% for M1 and 9.3% for StarHub. Our preferred picks for the sector are M1 and StarHub. Downgrade from BUY to HOLD. Entry price is S$2.55.

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