SingTel – DBSV
The trade-off between growth and yield
• Competitive environment seems to stabilize in India – welcome news for Bharti and SingTel.
• SingTel increased its stake in Bharti from 30.40% to 32.04%, justifying the lack of special dividends.
• BUY quality blue chip at 12.1x FY11F PE, below historical average of 13.4x. Target price revised to S$3.45, implying over 15% total returns potential.
Bharti surged significantly in the last one week. The worst of tariff cuts in India seem to be over as new entrants face challenges in expanding network coverage and capacity. This can partly be attributed to a recent regulation mandating the pre-approval of telecom infrastructure equipment. The wireless industry added only 16.3m subscribers in May, compared to 16.9m in April and 20.3m in March. Bharti’s share of newly added subscribers improved to 18.4% in May, compared to 17.7% in April and 14.8% in March. New entrants (Unitech, Sistema and Loop) witnessed a decline in their shares in May, vindicating our view that smaller players are less aggressive now.
Management seems to prefer growth to dividends. SingTel has raised its stake in Bharti to 32.04% from 30.4% (in Nov 09), costing about S$600m-S$900m. In the medium term, more M&A activities (preferably higher stake in associates) may lead to higher than expected earnings growth. Else dividend payout should improve to 75% (58% last year), translating to 7% yield in our view.
Slight upward revision in earnings and target price. We have updated our model to reflect higher stake in Bharti. This raised earnings estimates by 1.8%/1.7%. Our SOTP based target price is revised to S$3.45 from S$3.40. Optus continues to ride on incumbent’s dilemma in Australia. Regional associates should keep growing with renewed Bharti. Near term weakness in Singapore (as guided by
management already) is not a big concern as such.