SingTel – DBSV

Optus is the new reason

At a Glance

• Underlying profit of S$1022m beat consensus by 5%. Optus surprised with higher revenue and margins, led by the mobile segment

• 8 Scents final dividend in line, no special dividend

• FY11F guidance – S’pore EBITDA to decline low-to-mid single digit, Optus EBITDA to grow mid-single digit.

• Maintain BUY. For growth at Optus, Telkomsel & lower losses at Warid despite challenges at Bharti; TP S$3.40 based on SOTP valuation.

Comment on Results

Optus results significantly better than expectations due to benign competition. Optus’ net profit of A$220m (+14% yoy, +33% qoq) was ahead of our expectations. While 4Q is typically strong in margins after the festive promotion in 3Q, we did not expect the margin rebound to be so strong due to higher iPhone acquisition costs. Optus’s EBITDA margins of 27.3% (23% in 3Q10, 27.8% in 4Q09) resulted in 15% qoq rise in EBITDA. This is all the more impressive as Optus added 147k postpaid subscribers in the quarter, most likely increasing its market share.

Optus guidance for FY11 in line. Management guided for (i) midsingle digit growth in revenue and EBITDA (ii) Capex of A$1.2bn (A$1.05bn in FY10) and free cash flow above A$1.0bn (A$1.01bn in FY10). We have modeled EBITDA growth at 3.8% in FY11F.

Singapore results slightly lower than expectations. Singapore EBITDA margins came at 35.3% compared to our 36% estimate, due to higher selling & admin expenses (+24% yoy, +7% qoq). This can be attributed to higher content costs for mio TV and smart phone retention costs.

Singapore guidance for FY11F in line. Management guided for (i) mid-single digit revenue growth, but low-to-mid single digit decline in Singapore EBITDA (ii) Capex of S$830m (S$652m in FY10) and free cash flow around S$1.1bn (S$1.29bn in FY10). We have modeled 1.8% EBITDA decline in our forecasts.

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