SingTel – Daiwa

1Q FY11 results preview: associates offset Optus’s strength

What has changed?

• Singapore Telecom (SingTel) is scheduled to announce its 1Q FY11 results on 12 August 2010. We expect the company to reaffirm its FY11 guidance.

Impact

The numbers. We forecast 1Q FY11 net profit to decline by 1% YoY as we expect the contribution from associates to be a drag on the company’s overall profitability, despite likely positives including a strong performance by subsidiary Optus (Not listed) and favourable currency fluctuations.

Optus expected to shine. We believe the solid mobile revenue-growth trend of the past few quarters is set to continue, and forecast the EBITDA margin to rise by 1.5 percentage points year-on-year for 1Q FY11.

Singapore EBITDA expected to be flat. Despite our expectation of strong revenue growth, driven by mobile and IT divisions, we expect the EBITDA margin to fall due to a changing business mix and a likely increase in pay-TV costs.

Looking for associates to remain a drag. We expect a 15% YoY decline in the pre-tax earnings of associates. We think this will be driven by margin erosion at Telkomsel (Not listed) as a result of a rise in network expenses.

Valuation

• We maintain our 3 (Hold) rating and sum-of-the-parts-based six-month target price of S$3.09.

Catalysts and action

• A rejuvenated Optus is a bright spot, but we are concerned about the outlook for the company’s associates, which accounted for 48% of SingTel’s FY10 EPS. Based on our estimates, the core (Singapore and Optus) business is trading at a market-implied valuation of S$1.64/share. This is a 10% premium to our S$1.44 fair-value estimate, and is unattractive in our view.

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