SingTel – Daiwa

1Q FY11 results preview: associates offset Optus’s strength

What has changed?

• Singapore Telecom (SingTel) is scheduled to announce its 1Q FY11 results on 12 August 2010. We expect the company to reaffirm its FY11 guidance.

Impact

• The numbers. We forecast 1Q FY11 net profit to decline by 1% YoY as we expect the contribution from associates to be a drag on the company’s overall profitability, despite likely positives including a strong performance by subsidiary Optus (Not listed) and favourable currency fluctuations.

• Optus expected to shine. We believe the solid mobile revenue-growth trend of the past few quarters is set to continue, and forecast the EBITDA margin to rise by 1.5 percentage points year-on-year for 1Q FY11.

• Singapore EBITDA expected to be flat. Despite our expectation of strong revenue growth, driven by mobile and IT divisions, we expect the EBITDA margin to fall due to a changing business mix and a likely increase in pay-TV costs.

• Looking for associates to remain a drag. We expect a 15% YoY decline in the pre-tax earnings of associates. We think this will be driven by margin erosion at Telkomsel (Not listed) as a result of a rise in network expenses.

Valuation

• We maintain our 3 (Hold) rating and sum-of-the-parts-based six-month target price of S$3.09.

Catalysts and action

• A rejuvenated Optus is a bright spot, but we are concerned about the outlook for the company’s associates, which accounted for 48% of SingTel’s FY10 EPS. Based on our estimates, the core (Singapore and Optus) business is trading at a market-implied valuation of S$1.64/share. This is a 10% premium to our S$1.44 fair-value estimate, and is unattractive in our view.