SingTel – CIMB

Overseas weakness

In line; maintain Underperform. 1QFY11 core net profit was in line with our expectation but below consensus, with variances of -3% and -7% respectively when annualised. SingTel Singapore’s contribution was stronger qoq on higher margins. There was seasonal weakness at Optus. Associate contributions were weaker due to Bharti (Zain Africa dilution and financing costs) and Globe (stiff competition).

SingTel has kept its guidance but lowered Telkomsel’s revenue growth from high single digits to mid-single digits, which does not surprise us. We maintain our UNDERPERFORM rating, earnings forecasts and SOP-based target price of S$3.00 as the results reinforce our view that SingTel’s performance this year will be muted. Likely de-rating catalysts are further negative earnings surprises, weaker margins in Singapore on higher content costs and lower associate contributions because of Bharti’s earnings dilution.

Stronger EBITDA in Singapore. SingTel’s revenue declined 7% qoq owing to lower contributions from its lumpy and low-margin IT and Engineering Services. EBITDA margins rose 3.6% pts qoq on lower contributions from IT and Engineering.

Seasonal weakness in Australia. Optus’s revenue inched up 1% qoq but EBITDA margins fell 2.8% pts because of seasonal weakness.

Weaker associates. Associate contributions were weaker due to: 1) Bharti, which was diluted by Zain Africa losses and financing costs. Going forward, we expect Zain’s losses to dilute Bharti’s earnings further as Zain only contributed 23 days to 1QFY11 results; and 2) Globe on stiff competition. Revenue was affected by the popularity of bundled services and unlimited offerings. Telkomsel lowered guidance from high-single-digit revenue growth to mid-single-digit, which does not surprise us.

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