SingTel – DBSV
Four key issues
• National Broadband Network will not hurt SingTel contrary to popular perception. Any potential divestment of Telkomsel to be neutral or positive
• Bharti is set to grow again although street may be overly optimistic while Optus faces competition in the near term
• Trading at 1-year forward PE of 13.0x below 13.2x historical average. Upgrade to BUY with revised TP of S$3.43 for resilient earnings and over 5% yield
Core plus Telkomsel & Bharti make up over 90%of group earnings. Singapore contributed about 32%, Optus 26%, Telkomsel 17% and Bharti 16% of FY11 earnings.
Market is overly worried about threat from NBN. There are three key factors here: (i) Porting limit of only 2400 connections per week for NetCo implies that full migration will take at least 8 years; (ii) NBN is not reaching fully inside corporate buildings due to resistance from building owners; (iii) Most importantly, SingTel gets 75% of NetCo revenue for allowing NetCo access to its network.
Optus is facing intense competition. Both Telstra and VHA have launched aggressive iPhone 4S plans, forcing Optus to follow suit. All telcos are offering extra subsidy of A$100 on mid-tier plans. Also potential cut in mobile termination rate in 2012F may have minor adverse impact.
Issues with Telkomsel & Bharti. Possible scenario of an all-cash sale of Telkomsel could be positive while other scenarios could be neutral to slightly positive. Meanwhile, Bharti is set for growth with Africa as the key driver; however street may be overly optimistic on India.
Upgrade to BUY with SOP based TP of S$3.43. The key change is higher valuation for Telkomsel in the light of improved competitive environment in Indonesia. Weaker regional currencies versus SGD would be the key downside risk to our TP.