SingTel – CIMB
Bharti’s 4Q11 was in line
Bharti’s 4Q11 results
Maintain Underperform. SingTel’s Indian associate, Bharti, reported FY11 results that met estimates with core profit 2% ahead of consensus (we use these for our SingTel forecasts). Consolidated topline was up 3% qoq, aided by elasticity gains in Africa and India though margins had dropped in India, partially offset by Africa. We make no adjustments to our earnings forecasts, SOP-based target price of S$3.29 and UNDERPERFORM rating for SingTel pending its results announcement on 12 May. Potential de-rating catalysts are regulatory risks in Thailand and competitive risks in Australia and Singapore.
Lower qoq. Bharti’s consolidated revenue rose 3% qoq, aided by growth in both its Indian/South Asian (+3% qoq) and African operations (+3% qoq) as elasticity gains occurred in both markets. Consolidated EBITDA margins shed 0.3% pt qoq as India booked weaker margins (-0.7% pt qoq) excluding rebranding costs. This was partially offset by its African operations. The lower margins, higher interest expense from higher debt for 3G and Africa and tax caused core profit to fall 19% qoq.
More on India. Revenue grew 3% qoq on the back of increased elasticity. RPM slid only 2% qoq, pointing to intense but rational competition as RPMs have stabilised over the past few quarters. However, margins were hurt by higher network opex (addition of 3G sites, expansion in Bangladesh and Sri Lanka and its DTH business), higher access charges and spectrum fees. Mobile margins have been dropping, falling from 36.4% in 4Q10 to 33.3% in 4Q11 on higher spectrum fees.
3G and MNP. Bharti has launched 3G services in nine of the 13 circles for which it had won spectrum. It is awaiting clearance before proceeding with the remaining four circles. It is in talks with other leading operators to have a nationwide 3G presence. For MNP, there has not been much of an impact as only 1.1% of the subscriber base had requested to port and Bharti is capturing a disproportionate share of that number.
More on Africa. The bulk of tariff correction in Africa has been completed. It has also gained revenue market share in all the markets it operates in. Through the implanting
of its unique business model, it has begun to lower costs and costs/minute should continue to drop over the next 4-6 quarters. While pricing power is important, Bharti would look to reducing tariffs as costs continue to fall over this period. EBITDA margins rose 1% pts qoq (exclude re-branding initiative in 3Q) in 4Q11 and Bharti expects positive margins to continue as scale benefits flow through and as it cuts costs further. One area of potential margin concern is access charges which rose 12% qoq. Bharti is looking to drive more off-net traffic as it strives to have a more equal mix in on-net and off-net traffic. It expects the impact from traffic rebalancing to ease over the next two quarters. Other headwinds in Africa pertain to know-your-customer requirements in many countries in Africa which are more stringent than Indian requirements. Another headwind pertains to supply constraints from some strategic partners but this constraint is only expected to be short term.
DPS declared and capex guidance. Bharti declared a dividend of Rp1/share following its practice of declaring dividends in 4Q since its maiden dividend in 2009. For FY12, Bharti intends to spend US$2.9bn-3.1bn on capex. India would consume US$1.5bn, Africa, US$1bn-1.2bn and the tower business, US$0.4bn.
Valuation and recommendation
Maintain UNDERPERFORM. We make no adjustments to our forecasts, SOP-based target price of S$3.29 and UNDERPERFORM rating pending SingTel’s results on 12 May. Potential de-rating catalysts are regulatory risks in Thailand and competitive risks in Australia and Singapore.