Weighed down by India

Post-results conference call

Maintain Underperform. We came away with our views unchanged on SingTel following its 3QFY10 results conference call. SingTel indicated that the commercial launch of NGNBN would likely be delayed to early 2H10 from April, but that it would continue to benefit as a contractor building the network. SingTel was non-committal on any potential capital management and we do not think it will happen at the end of

FY10. We raise our FY10-12 earnings estimates by 2-4% to account for a lower effective tax but maintain our sum-of-the-parts target price of S$3.30. SingTel remains an UNDERPERFORM as stiff competition and the auction for 3G spectrum in India coupled with prospects of intensifying competition in Australia loom over the stock. While its 3QFY10 performance was fairly strong, it was bolstered by a strong A$ which is now giving back some of its gains and a one-off tax credit in Singapore. We prefer M1 (Outperform, TP: S$ 2.07) for its potential capital management and benefits from NGNBN.

Group

Non-committal over capital management and Optus IPO. As usual, SingTel was vague about its capital-management plans despite a fall in its net debt/annualized EBITDA to below 0.9x and below its target of 1.5-2x. SingTel wants to have the financial flexibility to pursue growth and will review its cash levels if there are no imminent acquisitions. While its 3QFY10 net debt/annualised had drifted down to 0.85x and substantially below its target, we believe it is unlikely to declare anything substantial at end-FY10 because financial markets remain volatile, especially with concerns over sovereign debt defaults in Europe. SingTel had in the past returned 10-15 cts/share in dividends or capital when its net debt/annualised EBITDA fell to 0.8x. However, capital management at end-2010 is more likely as gearing continues to fall and financial markets normalise. SingTel was equally vague about its rumoured plans to list Optus and said it will consider anything that is value-accretive.

Still Asia-focused. SingTel reiterated that it remains focused on acquiring assets in the Asia Pacific and regions such as the Middle East and Africa. However, it added that it will be acquiring new capabilities to maximise the value of its existing assets. We believe this includes stimulating wireless broadband take-up and multimedia services among its emerging associates.

Singapore

Loss-leader strategy for mioTV. SingTel does not operate mioTV as a standalone business because mioTV is meant to help raise ARPUs for its broadband business and help SingTel make the transition from carriage provider to a multimedia service provider. We interpret this as SingTel positioning mioTV as a loss leader and will continue to be aggressive in acquiring content. This spells bad news for StarHub (Underperform, TP: S$2.14), in our view.

Likely delay in launch of NGNBN. SingTel indicated that commercial launch of NGNBN is likely to be delayed to early 2H10 from April, but the penalty for this will not be significant. No reasons were given for the delay and it expects the regulator to make an announcement on this.

Benefiting from rollout of NGNBN. With the rollout of the NGNBN in progress, SingTel is benefiting as a contractor via its IT units. While Open Net (the operating company) has not issued any capex guidance, SingTel indicated that Open Net’s capex should peak in 2010, which would be positive for SingTel. SingTel’s 3QFY10 IT and Engineering revenue jumped 13% qoq and contributed to a modest 7% of group revenue.

Australia

EBITDA guidance maintained. Optus reaffirmed its single-digit EBITDA guidance for FY10 despite its: 1) strong push for market share in mobile which would inevitably sacrifice margins; 2) 4Q09 strength; and 3) 9M10 yoy EBITDA growth of only 4%, as it expects 4QFY10 to be seasonally stronger.

Slowing on-net fixed broadband but strong wireless broadband. Optus’s on-net fixed broadband net adds had moderated to 8K in 3Q from the 25K-33K in the past few quarters because of competition and the somewhat substitutable but mainly complementary effects of wireless broadband. On the positive side, wireless broadband net adds were still healthy as Optus added 111K in 3Q vs. the 100K-104K net adds seen in past quarters.

Fixed-line strategy. Optus reiterated its three-pronged fixed-line strategy: 1) focus on its on-net business where it is upgrading its HFC network in Melbourne and Brisbane; 2) concentrate on driving costs down; and 3) preparing for NBN. Efforts have paid off with its business and wholesale EBITDA margins raised from the high teens to the mid-20s in 3QFY10, and EBITDA margins rising to 15% in consumer and SMB from 13% a year ago. It has also captured a 20% market share in areas where it has network coverage.

Of spectrum, LTE and NBN. The recent acquisition of 10 MHz of paired spectrum in 2100 MHz in eight capital cities would help to improve the quality and capacity of its network and help it cope with wireless broadband traffic. While it is running LTE trials currently, it does not see spectrum availability or the necessary devices and applications before 2012. Finally, on NBN, it is providing data and input for wholesale pricing and hopes for competitive access terms that would provide the best cost to taxpayers. It also hopes that any cash payment paid to the incumbent for use of passive infrastructure or copper assets would be made visible and transparent.

Valuation and recommendation

Raising forecasts on lower tax assumptions. We have raised our FY10-12 core net profit estimates by 2-4% to account for a lower-than-expected effective tax, especially in FY10. This is due to tax credits from a lower statutory tax rate in Singapore from 18% to 17% this year. We have assumed higher FY11-12 core net profit estimates after lowering our effective tax for its associates, based on YTD trends. However, our sum-of-the-parts target price of S$3.30 is unchanged as our earnings revisions are minor. SingTel remains an UNDERPERFORM as we believe intense competition in India coupled with prospects of a heated 3G spectrum is likely to weigh on stock sentiment. Also, competition in Australia could intensify with Vodafone Hutchison Australia looking to unseat Optus for the second spot. While its 3QFY10 performance was fairly strong, it was bolstered by a strong A$ which is now giving back some of its gains and a one-off tax credit in Singapore. Switch to M1 (Outperform, TP: S$ 2.07) for its potential capital management and benefits from NGNBN.

3Q10 Results

SingTel reported 3Q10 operating revenue of S$4,450m (+20.2% yoy) and net profit of S$991m (+24.0% yoy). We were impressed by its strong performance as revenue was 3.0% above our estimate of S$4,321m while net profit was 3.6% higher than our estimate of S$957m. SingTel’s Singapore operations posted revenue growth of 1.5% to S$1,530m. Its Australian unit, Optus, reported revenue increase of 4.8% to A$2,302m. In Singapore dollar terms, Optus revenue rose by 33.1% to S$2,920m due mainly to the appreciation of the Australian dollar. Furthermore, the share of regional associates’ earnings increased by 22.0% to S$592m due to the improvement in Telkomsel’s performance. 

Greater market share in Pay TV

SingTel has won the rights for Barclays Premier League (BPL) matches for three years from August 2010. It is offering subscription for BPL matches at an attractive price of S$23 per month excluding goods and services tax (GST). We expect about 90,000 football fans to switch from StarHub to SingTel. At the same time, SingTel is likely to introduce more programs on its mioTV to boost its customer base and grab market share from StarHub. 

Listing of Optus

There has been market speculation that SingTel may list Optus on the Australian stock exchange. We feel that it is likely to happen only if SingTel requires the funds for regional expansion such as acquiring a stake in a mobile telecommunications provider in an emerging country. Otherwise, SingTel has sufficient cash to maintain its operations. 

FY2010F Outlook

The company expects the operating revenue for the Singapore and Australian businesses to grow at low single-digit level. The earnings of Bharti and Telkomsel are also likely to improve in local currency terms. It anticipates the regional mobile associates to announce lower ordinary dividends. 

Maintain BUY recommendation and fair value at S$3.52

SingTel has reported better-than-expected results for 3Q10. It is also expected to benefit from the recovery of the global economy. We like SingTel for its growth prospects as its Singapore and Australian operations as well as regional mobile associates continue to post increases in revenue and profit. Therefore, we maintain our buy recommendation. Based on the discounted cash flow model, the fair value is S$3.52.

SingTel scores a sizzler, with mio TV base up 23%

A passion for football and a good bargain appear to have cooled the controversy over hardware compatibility and content exclusivity, with Singapore Telecommunications registering sizzling growth in its pay TV subscribers.

Singapore’s largest telco added 29,000 new mio TV customers for the three months ended Dec 31, the same quarter it outbid rival StarHub to score the exclusive right to broadcast the 2010 to 2013 seasons of the Barclays Premier League (BPL).The 23 per cent increase is the biggest quarterly gain it has recorded since the inception of the Internet- based television service in 2008 and early proof that the pricey league could indeed be the game-changer for the firm’s fledgling pay television business.

The recent customer boom lifted SingTel’s pay TV base to a sizeable 155,000 at the end of December, and the numbers are expected to swell further in the coming months. StarHub, however, still has a sizeable lead with a cable TV customer tally of 539,000.

Still, year-on-year, total mio TV subscribers have grown by 163 per cent.

‘The minute the (current BPL) season ends, we expect our (mio TV) installation rate to increase yet again,’ said SingTel Singapore CEO Allen Lew, without providing projections.

All this has taken place despite the stormy exchanges in online forums and newspapers since SingTel’s BPL coup last October.

It sparked a heated debate over the thorny issue of content exclusivity and the hassle of requiring separate set-tops for programmes from different pay TV operators.

StarHub added fuel to the fire with its failed offer to carry SingTel’s sports programming on its cable television platform, while government agencies said that they were looking into the longer-term possibility of having a unifying set-top.

To further stoke the fire, some customers who recently signed up for SingTel’s mio TV packages complained of lengthy waiting times and technical glitches, which the company had attributed to the manpower strain from the surge in installation requests.

‘We have increased the number of installers that we have at our disposal to cope with the demand. And we are preparing them to cope with an even bigger influx (of customers) that we expect to come in the June to July timeframe,’ Mr Lew said.

To draw subscribers to its camp, the company is currently dangling an early-bird promotion which includes access to all 380 matches in the upcoming BPL season, as well as UEFA Champions League and Europa League ties, for $23 a month. Customers can pay $2 more for additional channels from ESPN Star Sports.

StarHub customers currently pay $25 a month for its sports group on top of a basic subscription, which starts from around $25.

In addition, SingTel customers can be assured that the installation crew will only fix up the mio TV hardware when they are at home to oversee the process, Mr Lew said.

‘After every single installation, our manager will call the homeowner. It’s not just a random sample check, it’s a 100 per cent check,’ he told BT at the sidelines of the firm’s third-quarter results briefing.

SingTel yesterday posted a third consecutive quarter of bottomline improvement with a 24 per cent jump in Q3 net profit to $991 million.

Underlying earnings per share for the three months ended Dec 31 climbed 18.3 per cent to 6.22 cents, while operating revenue rose 20.2 per cent to $4.45 billion.

SingTel profit jumps 24% in Q3

Telco benefited from stronger Aussie dollar and rebound in Telkomsel earnings

SINGAPORE Telecommunications makes it a hat-trick with its net profit rising for the third straight quarter on the back of yet another strong overseas performance.

South-east Asia’s largest telco yesterday reported a 24 per cent jump in net income for its fiscal third quarter to $991 million, up from $799 million last year.

Earnings per share for the three months ended Dec 31, 2009, climbed 23.9 per cent to 6.22 cents, while operating revenue rose 20.2 per cent to $4.45 billion.

SingTel, which derives 73 per cent of its Ebitda – earnings before interest, tax, depreciation and amortisation – from overseas, benefited from the appreciation of the Australian dollar and a rebound in Indonesia associate Telkomsel’s earnings during the quarter.

Pre-tax profit contributions from the group’s six regional affiliates – Bharti Airtel, Telkomsel, Globe, AIS, Warid and PBTL – grew 21.3 per cent to $560 million during the quarter.

Star performer Telkomsel grew its contributions by 53.1 per cent to $238 million in Q3 following the ceasefire in the price war between Indonesian telcos.

Bharti Airtel, SingTel’s largest overseas associate, was next in line with its share of profits rising 4.6 per cent year-on-year to $235 million.

At the start of the quarter, Bharti failed in its second attempt to merge with South African telco, MTN Group. However, it pressed ahead with plans for overseas diversification by snapping up a 70 per cent stake in Sri Lankan operator Warid for US$300 million last month.

SingTel was initially mulling a top-up in Bharti as its stake in the Indian telco would have been diluted through the MTN union.

‘We work as strategic partners to our various associates and we would discuss with them whether it made sense for us to go on our own or to work with the associates (for overseas acquisitions),’ SingTel group chief executive Chua Sock Koong told reporters at its result briefing.

‘In some cases (such as the Bharti-MTN deal), it made sense for the associate to be leading the transaction,’ she said. ‘Our focus remains on Asia. We are also looking at some adjacent markets, including Africa and the Middle East.’

Profit contributions from Globe in the Philippines and AIS in Thailand fell 5.7 per cent and 12.2 per cent in the third quarter to $54 million and $52 million respectively.

SingTel’s remaining associates – Pakistani operator Warid and PBTL in Bangladesh – continue to be in the red with losses of $15 million and $4 million.

Profits from SingTel’s Australian unit Optus soared 47.4 per cent to $210 million in Q3 due to the strengthening of the Australian dollar.

The Aussie dollar’s appreciation and Optus’ strong performance in recent quarters again triggered speculation that SingTel could be looking to cash out by selling off a partial stake in the subsidiary.

‘No decision has been made on selling or listing Optus. Optus continues to generate healthy cash flows and it is a significant contributor to SingTel’s overall financial performance,’ Ms Chua stressed.

The group’s Singapore operations registered a 6.5 per cent rise in net profit to $343 million due to tighter cost control measures.

Revenue from its local telecommunications business grew 1.8 per cent to $1.2 billion during the quarter, while sales from its IT and engineering arm edged up marginally by 0.6 per cent to $363 million.

In the previous corresponding period, the company’s IT and engineering revenue included the results of Singapore Computer Systems (SCS) for the four-month period of September to December 2008. Wholly owned SCS was acquired in September 2008.

Excluding SCS’ revenue for September 2008 in the last corresponding quarter, IT and engineering revenue rose 13 per cent year on year.

For the first nine months of this financial year, SingTel’s group net profit grew 13.6 per cent to $2.9 billion on the back of a 9.1 per cent increase in sales to $12.4 billion.

Looking ahead to the full year, SingTel has reaffirmed its guidance of growing its Ebitda in Singapore and Australia at the single-digit level. It also expects pre-tax earnings from Bharti and Telkomsel to rise in local currency terms.

SingTel shares closed eight cents higher at $3.03 yesterday.

Favourable forex rates boosts results further

• SingTel’s 3QFY10 results came in ahead of expectations. Net profit surged a strong 24% YoY to S$991mil, with underlying net profit (i.e. excluding exceptionals) at S$990mil – a strong 18% YoY growth.

• Results were largely helped by favourable forex movements from a strong Australian dollar, which appreciated 27% YoY. This helped contribution from wholly-owned Optus in Australia to jump 48% to S$210 in net profit. Optus accounted for 21% of group net, up from 18% a year ago.

• Besides help from forex rates, SingTel’s core operations also performed well. Its operations in Singapore grew net profit by 7%, making up a third of group earnings. At the same time, Optus enjoyed a healthy 15% YoY net profit growth in local currency terms.

• Mobile segment was a key driver, largely due to strong iPhone take-up. Mobile accounted for 42% of group revenues. Second key segment was data and Internet, which grew 15% YoY and made up 19% of revenue.

• Despite stiff competitive pressures in its mature markets, EBITDA margins maintained – 37% in Singapore and 23% in Australia.

• Contributions from associates jumped 22% YoY to S$592mil, and accounted for 44% of EBIT. This was mainly due to a turnaround in Telkomsel’s (Indonesia) earnings combined with a 6% YoY appreciation of the Indonesian Rupiah. Telkomsel thus accounted for 40% of associates, while Bharti made up another 40% – with a 7% YoY increase in contribution.

• We maintain our forecasts, as well as fair value (FV) at S$3.05/share. With the stock trading around FV, we are maintaining our rating at HOLD.

• Free cash flows remain strong, supporting our expectation of DPS at 12.5 cents Singapore for full year. A 6.2 cent DPS was paid out for 1HFY10. While management guides for slightly lower cash flows for Singapore and dividends from associates – this will be offset by higher translated cash flows from Optus.