Inline results, worries ahead

SingTel reported underlying net profit of S$838m (-10.1% y-o-y, +4.6% q-o-q) exactly inline with our estimate of S$835m, which we had highlighted in SingTel’s earnings preview on 30 Jan. The key variances were (i) Singapore performed slightly better than our expectations with sequential improvement in both topline and margins; (ii) Regional associate’s post-tax contribution was lower than our expectations due to worse performance of Telkomsel. While risk to associate growth has materialized already, going forward, with SingTel having the majority market share of corporate customers in Singapore, we believe that Singapore earnings could be at risk if corporate cut spending to save costs.

Tax savings on dividends resulted in sequential improvement. 3Q09 benefited from the absence of tax on dividends to be recognized from associates (S$33m tax in 2Q09F), resulting in sequential improvement in profit. We think, consensus did not factor in this tax savings, which could be the reason that consensus estimates of S$790m, seen on the Bloomberg, is lower than the actual underlying net profit. However, our FY09 and FY10 earnings estimates are 3% and 5% below consensus estimates respectively.

Lower sequential contribution from associates due to Telkomsel. Telkomsel’s post-tax contribution was down 51% y-oy and 23% q-o-q, mainly due to high competition and partly due to weaker IDR (12% y-o-y and 10% q-o-q). While we expect some improvement in Telkomsel’s contribution going forward sequentially, we do not expect Telkomsel to return to the positive growth territory, on an annual basis in FY10.

Our FY09 and FY10 estimates are 3% and 5% below consensus estimates respectively. Maintain FULLY VALUED, and SOTP-based target price of S$2.52. Key risks are (i) lower corporate spending in Singapore where SingTel has a majority market share, (ii) weak performance of associates as disposable income is impacted in their countries, (iii) lower growth for Bharti, if Rcom continues with aggressive pricing on GSM network, (iv) exchange rate risks, and (v) potentially higher capex in Australia, implying short-term funding issues.

SingTel mobile subscribers growing

Group customer base up 35% year on year, with S’pore base up 26%

DEFYING weak market conditions, Singapore Telecommunications posted sturdy growth in both local and regional mobile subscribers last year.

Its combined regional mobile customer base (including for Singapore) reached 232 million as at Dec 31, 2008, a jump of 35 per cent or 61 million from a year ago, South-east Asia’s largest teleco said. This was a 7.3 per cent increase from a quarter ago.

For Singapore itself, the number of mobile subscribers grew 26 per cent from a year ago to 2.94 million at the end of 2008.

Of the 68,000 new mobile customers added during the quarter to Dec 31, 2008, 30,000 were postpaid net additions with continued good take-up of the Apple iPhone.

SingTel said the the demand for third generation (3G) services in Singapore remains strong. In the calendar fourth quarter, 71,000 3G mobile subscribers were added, bringing the total 3G subscriber base here to 1.14 million by end-2008.

Elsewhere, the group’s regional associates also reported strong growth in customer base.

‘Despite stiff competition in their home markets and the global economic crisis, the six regional associates continued to post double-digit customer growth of between 13 per cent and 55 per cent compared to a year ago,’ SingTel said in a statement.

Bharti, SingTel’s Indian associate, posted the biggest jump in customer numbers among the associates. Its mobile base jumped 55 per cent year-on-year and 11 per cent quarter-on-quarter to 85.7 million customers. Its net addition of 8.2 million mobile customers in the quarter ended Dec 31, 2008 was also its highest-ever quarterly growth.

Optus, SingTel’s wholly owned Australian unit, expanded its mobile customer base by 9 per cent from a year ago to 7.63 million as at Dec 31. It attracted 213,000 new customers in the quarter, reflecting the success of its innovative services and plans, together with its expanded distribution channels and 3G network.

Indonesian associate Telkomsel’s total mobile customer base grew 36 per cent year-on-year to 65.3 million at end-2008. It added 4.8 million customers during the quarter, thanks to the re-launch of the popular mobile subscription plan simPATI PeDe in the preceding quarter. Even the more mature markets of Thailand and the Philippines saw year-on-year growth of 13.4 per cent and 21.6 per cent in mobile subscribers at AIS and Globe respectively. Pakistan associate Warid and PBTL in Bangladesh also posted double-digit growth in mobile customers from a year ago.

SingTel is announcing its fiscal third quarter ended Dec 31, 2008 this morning.

CIMB-GK is expecting its core net profit to further decline to $760-790 million from $801 million in fiscal Q2, while DBS Vickers expects SingTel to report underlying net profit of $835 million, a 10 per cent decline from a year ago but a 4 per cent increase from the preceding quarter.

Breathing A Little Easier

Lower revenue/profits expected but better margins
SingTel will be reporting 3QFY09 results on 10 Feb. We expect underlying net profit to decline 15% yoy to $792m on the back of a 4% yoy (5% qoq) decline in revenue to $3681m. However, EBITDA margin is expected to rise 1 percentage point qoq to 28.7% while share of associates’ profits is expected to be flat qoq but down 28% yoy.

Margins should rebound as rivalry eases
Group EBITDA margin should have improved qoq following the sharp decline in 2Q09, which was caused by launch costs and hefty subsidies for the Apple iPhone. In Singapore, competition had also noticeably retreated after 4-5 quarters of intense market share grab that caused EBITDA margin to fall from 31% in 1Q08 to 27.7% in 2Q09.

Associates expected to be lower in general
Associates had a mixed performance during the quarter. Bharti did very well (3Q09 sales +7%, PBT +25% qoq) as the Indian market remained immune to the economic crisis. Globe reported a very strong 4Q08 saleswise (5% qoq) as it benefited from strong demand for data and broadband, but reported a 15% qoq drop in profit due to higher expenses.

Currencies stabilising but impact still negative in 3Q09
Currencies in general have been less volatile than in the past few quarters. Still, the average value of the Australian dollar, Indonesian rupiah and Indian rupee depreciated 18%, 12% and 5% during the quarter, impacting Optus, Bharti and Telkomsel. They account for roughly 60% of PBT. AIS and Globe contributions however should flow through without any forex muddying of the waters.

Maintain BUY recommendation with $2.88 target
We maintain our BUY call on SingTel with a blended DDM/SOTP target of $2.88. Potential catalysts include potential currency appreciation in future as the worst of the crisis newsflow appears to have passed. In addition, a benign competitive landscape in Singapore could draw attention to SingTel’s defensive business and decent dividend yield.

3Q08 results preview: diluted by regional currencies

SingTel is expected to announce 3QFY09 results on 9 Feb 09. We expect its core net profit to further decline to S$760m-790m from S$801m in 2QFY09, on the back of an expected 8-12% qoq and 9-13% yoy decline in revenue, a 1-2%-pt increase in EBITDA margins qoq, and flat qoq but 20-28% yoy decline in associate contributions.

Operational improvements at subsidiaries. We believe EBITDA margins rebounded in Singapore and Australia after plunging in 2QFY09 on the back of high subsidies for the iPhone. Subsidies are expected to decline qoq in 3QFY09. In Singapore, mobile competition had eased in 4Q08 after four quarters of intense competition.

Improved results for key associates. Bharti announced a commendable set of results, with revenue surging 7% qoq and EBITDA margins gaining 3.3% pts. After a sharp contraction in the previous quarter, we expect Telkomsel’s revenue and EBITDA margins to rebound in 4Q08 on the back of higher tariffs, lower network congestion and festivities. On the other hand, Globe Telecom’s 4Q08 PBT declined qoq.

Regional currency weakness. The Australian dollar, Indonesian rupiah and Indian rupee depreciated 25%, 20% and 8% qoq respectively against the S$ during the quarter, effectively wiping out all operational gains at these units. SingTel’s units in these countries contributed an estimated 59% of FY09 PBT.

Weaker regional currencies wiped out S$86m (S$36m due to A$, S$31 due to Rp and S$19m due to Rs) or about 11% from SingTel’s core net profit. Excluding the impact of weaker currencies, SingTel’s core net profit would have rebounded about 5% qoq.

Valuation and recommendation

Maintain OUTPERFORM and sum-of-the-parts target price of S$3.10. Catalysts for a re-rating could include:
• A$, Rs and Rp appreciation vs. the S$.
• Further signs of easing competition in Singapore.
• Strong qoq results at its key units, namely Telkomsel and Bharti.
• A bottoming out of its earnings in 3QFY09, given the turnaround of regional currencies and lower subscriber acquisition and retention costs in Singapore.