SingTel – AmFraser

Higher costs ahead

• SingTel’s FY10 EPS was in line with market consensus, though this was a marginal 2% below our estimates.

• The healthy 13% YoY growth in underlying net profit to $3.9bil was boosted by (1) 18% YoY jump in associate contribution to $2.4bil, and (2) 19% YoY surge in EBIT contribution from wholly-owned Optus in Australia to $1.3bil. Together, these accounted for 68% of group EBIT.

• Surge in Australia-Singapore dollar rate of 11% YoY played a big role, as Optus reported more moderate 8% YoY growth in local currency terms. In particular, 2HFY10 growth was largely driven by 27% YoY A$ appreciation, as A$/S$ had plummeted to parity levels in 2HFY09.

• But Optus also performed well at core operating level, driven mainly by mobile subscriber growth of 9% YoY to 8.5 million. Postpaid segment saw monthly net adds of 50,000, while ARPU inched up by $1 to $69/month. Emphasis on higher value iPhones and smartphones however, squeezed Optus’s EBITDA margins in 1Q to 3Q. But benefits from these higher value-added base led a recovery in 4Q, mitigating FY margin fall to 24%. Mobile accounts for more than 60% of earnings.

• At Associates, contribution from 35%-owned Telkomsel in Indonesia was the biggest driver; up 32% YoY led by core earnings recovery, while that from 32%-owned Bharti in India was up 13% YoY helped by fair value adjustment effects. Together, these made up 80% of Associates. Against S$, Indonesian Rupiah rose 2% while Indian Rupee fell 4%, on average YoY.

• EBIT at mature Singapore operations grew a modest 4% YoY. While topline growth (8% YoY) was buoyed by mobile postpaid and IT and engineering (+32% YoY) segments, these dampened EBITDA margin to 38% from 39% in FY09. Higher handset subsidies, higher mio TV content costs and lower typical IT margins were to blame. IT and engineering prospects is supported by a strong S$1.3bil order book and peak fibre rollout for OpenNet ahead.

• Overall, we lower forecasts by 3% – Management guides for mid-single digit core revenue growth, while EBITDA margin for Singapore will be squeezed to 35%. One key factor will be higher costs associated with its fledging pay TV business.

• Upside at associates will come from Telkomsel’s earnings, as well as an increase in associate dividend payout. Bharti’s earnings will be diluted by acquisition financing costs for Zain Africa BV and investment in 3G spectrum.

• Our fair value is fine-tuned slightly to $3.04 on DCF approach – we maintain HOLD. SingTel is raising FY10 DPS to 14.2 cents, with final DPS of 8 cents declared. Yield of 5% is decent but not overlycompelling.

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