Singtel – CIMB

Singapore blues, Optus bliss

SingTel’s 1QFY15 core net profit was below expectations, forming 22.1% of our full-year estimate (consensus: 23.0%). Associate earnings maintained its growth trajectory but came in lower vs. our forecast, largely due to the steep depreciation in the rupiah yoy. Elsewhere, Singapore came in weaker, dragged by higher cost, but this was offset by Optus, which surprised on the upside with better-than-expected margins. Management reaffirmed its guidance for FY15. We maintain our Add rating and SOP-based target price for now pending its results conference call later this morning. A likely re-rating catalyst is the continued turnaround in its earnings.

Singapore dragged by higher cost

Singapore’s results were below expectations. While revenue was 3.9% higher yoy, EBITDA fell 5.2% yoy. The margin slid 3.1% pts yoy to 32.0% due to lower enterprise earnings given more intense NBN competition and price reduction on contract transition for a large government project. There were also greater Digital Life losses and World Cup-related costs incurred in 1QFY15. While the enterprise business will remain under pressure, we expect Singapore earnings to start improving from FY16 onwards, boosted by data tariff adjustments.

Australia improves on lower cost

Optus’s results were above our expectations. Despite lower mobile termination rates, revenue fell only 2.8% yoy while EBITDA rose 4.4% yoy. The margin rose 200bp to 29.0% on lower subscriber acquisition cost (-13.6% yoy) and cost of sales. Operationally, the mobile subscriber base consolidated further by 0.3% qoq. We believe Optus will gain market traction in FY16 once its marketing initiative starts to pay off and its 4G-700MHz network goes ‘live’ in early 2015.

Associates to stay on growth track

Associate contributions improved, led by Bharti and Globe. However, it is tracking lower vs. our full-year forecast on weaker Telkomsel contributions caused by a steep 18.5% yoy depreciation in the rupiah. Nevertheless, associate currencies have stabilised and negative forex effects should abate in the coming quarters. Operationally, associates performed within expectations; Bharti was the star performer, with strong revenue growth and margin expansion.

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