SingTel – DBSV

Three thorns – Bharti, currency and ICO

Instead of easing, competition is intensifying in India; a weak Rupee compounds the problem further

Upcoming Inter Connect Offer (ICO) may spur faster fiber adoption along the S-curve in Singapore

The stock is trading at 13.4x PE versus 13.2x historical mean; Downgrade to HOLD as we see total potential returns of only 5% including dividends

Tariff cut of ~50% in India from May onwards. Leading operators including Bharti have lowered tariffs to 0.5 paisa per sec from 1.0 paisa through discount vouchers. At the same time, dealer commissions have also been raised substantially. We are not sure whether market leaders have embarked on these aggressive strategies to stem market share loss or whether small operators are trying to inflate their subscriber numbers before the expiry of 2G licenses.

Weak Indian Rupee (INR) is a key concern. INR has declined another 8% against SGD over the last 3 months. Normally this should have a 1% adverse impact on SingTel’s earnings. However, Bharti has a large USD denominated foreign debt which may result in significant forex losses. This could result in FY13F earnings growth coming in lower than our below consensus projection of 50% in INR terms.

Upcoming ICO to spur fiber adoption along the S-curve. In Singapore, regulator IDA is finalising the new ICO, which should help address key bottlenecks (installation quota) and have a regular review mechanism in place for the National Broadband Network. We expect 10-15% increase in the regular installation quota in 3Q12E and a similar increase in 4Q12E with six monthly reviews. An aggressive ICO could result in SingTel barely achieving stable Singapore EBITDA in FY13F compared to our expectations of 3% growth. There are other cost pressures in Singapore too.

Downgrade to HOLD with SOP based TP of S$3.29. The key change is weaker INR assumption in our valuation. SingTel has outperformed the STI by 8% over the last six months, which may not continue. We like SingTel’s strategy of venturing into mobile advertising space and its bold restructuring exercise. However, we expect to see cost pressures in the near term, before rewards in the longer term.

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