SingTel – CIMB
Expect a mixed 2QFY11 performance
2QFY11 results preview
Likely muted; maintain UNDERPERFORM. We expect SingTel’s 2QFY11 core net profit to be about S$950m, flat qoq and yoy on a mixed bag of factors: 1) contributions from Telkomsel should rebound, bolstered by a strong rupiah; 2) Optus should continue to grow; 3) SingTel Singapore’s margins should decline due to content costs and iPhone 4 subsidies; and 4) weaker numbers from Bharti due to 3G spectrum related interest expense and amortisation, and full-quarter losses from Africa. We estimate an interim DPS of 6.5cts or a 55% payout (6.2cts, 52% in 1HFY10). We maintain our SOP-based target price of S$3.09 with a view to rolling it 1-year forward after the results announcement on 11 Nov. Likely de-rating catalysts are weak numbers from India and Singapore and concerns over rising competition in Australia. M1 and Axiata remain our top Singapore and regional telco picks respectively.
We expect SingTel’s 2QFY11 core net profit to be about S$950m, flat qoq and yoy on a mixed bag of factors:
• Contributions from Telkomsel should rebound, bolstered by a strong rupiah. Telkomsel’s 3Q10 core net profit grew 6% qoq while the rupiah had appreciated 2% against the S$.
• Optus should continue to grow although its margins may succumb to pressure from iPhone 4 subsidies. The A$ was relatively unchanged qoq. However, these should be largely offset by:
• Weaker margins in SingTel Singapore due to World Cup and Barclays Premier League-related costs, mio-TV installation costs, and iPhone 4 subsidies, and
• Lower contributions from Bharti which is likely to book full-quarter losses from Africa, interest expense and amortisation related to the acquisition of its 3G spectrum and amortisation. Bharti began amortising the spectrum from 1 September. The rupee rose 5% qoq against the S$.
We anticipate an interim DPS of 6.5 cts or a 55% dividend payout vs. 6.2 cts or a 52% payout in 1HFY10, facilitated by a net debt/EBITDA ratio of only 0.23x vs. 0.3-0.4x in FY09-10.
Valuation and recommendation
We reiterate our UNDERPERFORM rating and SOP-based target price of S$3.09. We plan to roll over our target price 1-year forward after the results announcement. Likely de-rating catalysts are weak numbers from India and Singapore and concerns over rising competition in Australia. We believe SingTel does not appeal in terms of growth or dividends with its low EPS growth and moderate dividend yields of 5%. For exposure to the Singapore telecom sector and regional telcos, we prefer M1 and Axiata respectively.