SingTel – DBSV
Key takeaways from Bharti’s conference call on Zain
• Bharti highlighted warm responses from African governments and regulators. This may signal potential for interconnection rate cut in Africa.
• SingTel’s FY11F/12F/13F earnings would be raised by 1%/2%/3% if Bharti can improve Zain’s margins.
• SingTel is our top sector pick, for strong Optus & renewed Bharti, not reflected in its 12.3x PER (Hist avg. 13.4x) compared to STI FY10F PER of 13.9x.
Takeaways on regulations and strategy in Africa. Bharti acknowledged that interconnection rates were too high in Africa and could be lowered substantially based on interconnection costs incurred by most efficient operators. Bharti believes that new licenses are unlikely to be issued due to lack of cellular spectrum in Africa. Management plans to kick-start infrastructure sharing to lower the capex while expanding coverage in rural areas. Bharti sees huge opportunity in lower minutes of usage of 60 min/subscriber (Indian average is 450 minutes). Management also clarified that annual interest cost on Zain’s related debt is around US$200m, which can be serviced from Zain’s free cash flow. Bharti guided for annual capex of about US$800m, slightly lower than our US$1bn expectations.
Key challenge is to improve EBITDA margins in our view. Bharti intends to grow Zain’s subscriber base to 100m, revenue to US$5bn and EBITDA to US$2bn by FY13F. This translates to subscriber CAGR of 33%, revenue CAGR of 11% and EBITDA CAGR of 18% over FY10-FY13F. We believe 11% revenue CAGR is comfortably achievable. However, the key challenge would be to improve EBITDA margins, especially with declining ARPU as Bharti penetrates into the rural regions. We have assumed EBITDA CAGR of 11% for Zain in our model. If Zain can achieve 18% EBITDA CAGR, it would raise SingTel’s FY11F/12F/13F earnings by 1%/2%/3%, adding 10 Scents to our TP for SingTel.