SingTel – CIMB
Bharti’s 4QFY10 within expectations
Bharti’s 4QFY10 results
Maintain UNDERPERFORM on SingTel on the back of Bharti’s 4QFY10 results, which were in line with consensus (on which our numbers are based). 4Q was marked by fairly strong revenue growth despite price competition while net profit fell as EBITDA margins were weakened by competition, weakness across all major divisions excluding the passive infrastructure division and higher SG&A, licence fees and access charges. Bharti has proposed a final dividend of Rs1/share. We retain our earnings forecasts, sum-of-the-parts target price of S$3.30 and UNDERPERFORM rating for SingTel pending its results release on 13 May. We remain concerned about the hefty price Bharti will be paying for Zain Africa which could dilute SingTel’s earnings by 0.5-4% for FY11-13, the ongoing 3G auction in India, higher content costs in Singapore and stiffer competition in Australia.
Topline was surprisingly strong. Despite prevailing price competition, Bharti’s topline grew 3% qoq to reverse two quarters of qoq declines. A 7% qoq rise in subscribers coupled with strong minutes growth, as elasticity kicked in, led to a 5% rise in MOUs. which managed to offset a 4% qoq drop in ARPUs. Intense price competition continued to take its toll on revenue per minute, which slipped 10% qoq.
EBITDA margins weakened again. Consolidated EBITDA margins (excluding one-off costs for acquiring Zain Africa and Warid Bangladesh) fell for the third consecutive quarter to 39% in 4Q from 40% in 3Q due to competition. All major divisions booked lower EBITDA margins save the passive infrastructure segment. Higher sales, general and administrative (SG&A) expenses, which rose 11% qoq (excluding one-off acquisition costs), licence fees (+6.6% qoq) and higher access charges (+3.6% qoq) also contributed. As a result, core profit fell 3% qoq and 19% yoy.
Leverage ratios. Bharti says it has the capacity to leverage up to a maximum of 3x net debt/EBITDA. It would work to quickly de-lever if it approaches these levels. Our back-of-the-envelope calculations suggest Bharti’s net debt/EBITDA could potentially rise to 2.6x if pan-Indian 3G bids hit US$3bn, including the Zain acquisition.
Capex. It noted that 3G would not increase overall capex as 3G spending replaces 2G capex. It would spend US$300m-350m on Infratel. Excluding Infratel, Bharti would spend US$1.5bn-1.8bn in India and US$2bn including its South Asian operations and on 3G capex in FY11.
Elasticity. The 13% rise in mobile minutes was spurred by higher elasticity, especially with customers at the lower end of the income spectrum as a significant portion of its subscribers migrated to lower-priced plans first launched in Oct 09. Bharti believes that elasticity would continue to rise.
That said, any growth in elasticity could be offset by further price competition (while probably near the tail end) as: 1) Videocon has just launched plans with rather aggressive pricing; 2) Etisalat has yet to launch; and 3) new greenfield operators are expanding their rollout.
Consolidation and spectrum fees. Bharti will not participate in any consolidation in India as new operators have little to offer other than spectrum. However, it does see the industry consolidating as there are too many players and it believes that the market could ultimately support 5-6 operators.
Announced another dividend. Following a maiden dividend announced in 4Q09, Bharti has proposed a final dividend of Rs1/share for 4Q10. We were somewhat surprised. Although Bharti was FCF-positive in FY10, had turned net cash in 4Q10, and the amount declared is small, we nevertheless thought that it would need to preserve cash as the 3G auction has scaled up to dizzying heights, reaching close to US$2bn. Also, Bharti would need cash for its acquisition of Zain Africa, where it will be assuming US$10.7bn worth of debt.
Zain Africa deal closure soon. Bharti expects to conclude the deal in mid-May and would reveal more then. The process is said to be going rather well as approvals are streaming in and it is confident of securing all the necessary approvals.
Valuation and recommendation
Maintain earnings forecasts, target price and UNDERPERFORM. We make no changes to our forecasts, sum-of-the-parts target price of S$3.30 and UNDERPERFORM rating on SingTel pending its results announcement on 13 May. We believe Bharti paid a hefty premium to acquire Zain Africa, which would dilute SingTel’s FY11-13 earnings by 0.5-4%. Potential de-rating catalysts are the ongoing 3G auction in India which has reached dizzying levels and shows little signs of slowing down, higher content costs in Singapore and stiffer competition in Australia where Vodafone Hutch Australia (VHA) is looking to unseat Optus as the second largest operator.