SingTel – DBSV

Needs higher payout ratio to outperform

Bharti may grow slower than expected, eroding SingTel’s appeal as a cheap proxy to Bharti.

Slow adoption of Android phones in Singapore is not helping SingTel either.

Downgrade to HOLD with lower TP of S$3.20. Special dividends cannot be ruled out with 4Q11 results in order to compensate for lack of earnings growth.

Trimmed FY12F/13F group earnings by 4% / 6% mainly due to Bharti. While improved competitiveness in India and margin improvement in Africa bode well for Bharti, we underestimated the cost pressure from 3G rollout in India. Keeping in mind, higher depreciation & amortization and tax expenses, we downgraded Bharti’s earnings growth in FY12F to 15% from 30% earlier.

Slow adoption of Android phones. Singapore continues to lag behind markets like US and UK in terms of popularity of Android based phones, which require lower subsidies than iPhones. Higher breakeven costs of iPhones may continue to burden the margins of cellular players in Singapore.

Needs higher payout ratio to outperform in our view. We are projecting a 70% payout ratio for FY11F/12F, towards the top end of SingTel’s guidance of 55%-70%. Given non-compelling growth prospects, SingTel needs to (i) increase its earnings payout ratio to ~80% to formulate an attractive (~6.5%) dividend yield, or (ii) perform capital management proactively on top of its 70% payout ratio. Downgrade to HOLD with revised SOTP based TP of S$3.20. The stock is trading at 12.5x FY12F PE below its 4-year average of 13.2x. As such, downside risk is also limited in our view.

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