SingTel – CIMB

Stormier weather overseas

Post-results conference call

Cutting forecasts and target price; maintain UNDERPERFORM. SingTel’s post-FY09 results conference did little to change our pessimistic view, except that we now believe dividend payouts will remain at the higher end of its policy given a lack of acquisition targets. We expect Singapore’s FY11 core net profit to decline 7% yoy on higher costs related to mio TV content and installation. Bharti and Telkomsel, which normally help lift earnings, face headwinds from soaring 3G spectrum costs and regulatory risks in India, and rising competition in Indonesia. We cut our FY11-12 core net profit estimates by 9-11% and sum-of-the-parts target price by S$0.30 to S3.00 on lower estimates for Singapore, Bharti and Telkomsel. Switch to M1 for exposure to Singapore telcos and Axiata for exposure to regional telcos.

Key takeaways

Lower margins in Singapore. SingTel expects its EBITDA to decline to low-to-midsingle digits yoy on the back of mid-single-digit growth in revenue. This is due to content cost pressures for mio TV (we believe referring largely to the football World Cup and Barclays Premier League rights), installation costs for mio TV and continued erosion of IDD margins to VoIP. On top of this, we believe more intense competition for subscriber acquisition and retention will push up subsidies, especially after M1 and StarHub secured the rights to resell iPhones.

Mio TV gaining momentum. SingTel added a record 36k (or +23%) mio-TV subscribers as consumers signed up for its early-bird promotions even before the start of the next BPL season. It also attributed the strong growth to its new content line-up for its video-on-demand service.

Higher capex on WBB at Optus. Optus is raising its capex in FY11 to A$1.2bn from A$1.0bn in FY10 mainly for its wireless broadband (WBB) infrastructure. It has been upgrading its backhaul, where average bandwidth has risen 3-5-fold from 1-2 E1 lines to 6-7 E1 presently. Each E1 provides 2Mbps of capacity. Despite the strong take-up of WBB, it has yet to see any migration away from fixed broadband.

Dividend payouts to remain high. SingTel said it benchmarks its dividend yields to those of Singapore blue chips and regional telcos. It continues to manage its balance sheet to maintain financial flexibility for possible acquisitions. Excluding Bharti’s earnings because the telco pays negligible dividends, SingTel’s dividend payout is 74%. We believe payout will remain at the top end of its policy of 45-60% given a dearth of sizeable acquisition targets. SingTel admitted that Bharti’s acquisition of Zain Africa has removed one of the last remaining targets available. Closer to home, Vietnam remains a possible acquisition target but progress by the authorities has been agonisingly slow, in our view.

Punitive recommendations by Indian regulator. Separately, the Indian telecom regulator (TRAI) has proposed a series of recommendations on spectrum and licensing:

• The most important recommendation is that operators with spectrum of more than 6.2 MHz would have to pay a one-time fee based on 3G prices. The excess spectrum in 900 MHz and 1800 Mhz bands will be charged at 1.5x and 1.0x the cost of 3G spectrum respectively. Operators holding spectrum in excess of 8 MHz will be charged 1.3x the 3G price. This amount would be pro-rated for the period of their licences, subject to a minimum of seven years. In the meantime, bids for an all-India 3G spectrum continue to soar, crossing the US$3.2bn mark or more than four times its reserve price.

• Secondly, upon expiry of the licences, the 900 MHz will be exchanged for 1800 MHz spectrum as TRAI plans to re-farm (reuse) the 900MHz band after its expiry. 3G prices will be adopted as the current price of spectrum in the 1800 MHz band.

• Thirdly, licences fees will fall 6% by FY14 from the current 6-10% but this would be offset by higher spectrum charges, which will range from 2.2% to 10% from 3-8% previously.

• Finally, in terms of M&As, the government has waived the 3-year lock-in period. However, any merged entity cannot exceed 30% in revenue and/or subscriber base from 40% before and the total number of operators cannot hold drop to fewer than six in any service area (from four before). The merged entity also cannot hold more than 14.4 MHz.

Bharti likely to be hard-hit. We believe Bharti would be among the most affected and the one-time fee for excess 2G spectrum is arguably the most punitive measure and could be the one drawing the most resistance. The media reported that TRAI estimates Bharti would pay about Rs 34.98bn (Rs9.2/share) from the one-time fee and after include cuts in licence fee, the net impact on Bharti is about Rs15bn (Rs3.9/share).

The cap on spectrum at 8 MHz for all service areas and 10 MHz for Delhi and Mumbai for GSM operators arguably makes securing 3G spectrum all the more critical, especially with operators having to return their 900 MHz in exchange for 1800 MHz upon expiry of their licences. On the flipside, the higher the 3G prices, the more operators would have to pay as they renew their spectrum. Finally, we do not think that the M&A norms have been sufficiently relaxed as the one-time fee beyond 6.2 MHz would deter consolidation and the 30% threshold for a merged entity precludes most of the leading operators from consolidating.

Lastly, bids for the 3G spectrum continue to soar, reaching US$3.33b. Coupled with its financing for Zain Africa, the cost of the 3G spectrum will put more strain on Bharti’s balance sheet.

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