Overseas weakness

• In line; maintain Underperform. 1QFY11 core net profit was in line with our expectation but below consensus, with variances of -3% and -7% respectively when annualised. SingTel Singapore’s contribution was stronger qoq on higher margins. There was seasonal weakness at Optus. Associate contributions were weaker due to Bharti (Zain Africa dilution and financing costs) and Globe (stiff competition).

SingTel has kept its guidance but lowered Telkomsel’s revenue growth from high single digits to mid-single digits, which does not surprise us. We maintain our UNDERPERFORM rating, earnings forecasts and SOP-based target price of S$3.00 as the results reinforce our view that SingTel’s performance this year will be muted. Likely de-rating catalysts are further negative earnings surprises, weaker margins in Singapore on higher content costs and lower associate contributions because of Bharti’s earnings dilution.

• Stronger EBITDA in Singapore. SingTel’s revenue declined 7% qoq owing to lower contributions from its lumpy and low-margin IT and Engineering Services. EBITDA margins rose 3.6% pts qoq on lower contributions from IT and Engineering.

• Seasonal weakness in Australia. Optus’s revenue inched up 1% qoq but EBITDA margins fell 2.8% pts because of seasonal weakness.

• Weaker associates. Associate contributions were weaker due to: 1) Bharti, which was diluted by Zain Africa losses and financing costs. Going forward, we expect Zain’s losses to dilute Bharti’s earnings further as Zain only contributed 23 days to 1QFY11 results; and 2) Globe on stiff competition. Revenue was affected by the popularity of bundled services and unlimited offerings. Telkomsel lowered guidance from high-single-digit revenue growth to mid-single-digit, which does not surprise us.

Easing Fair Value to S$3.34

1Q11 results mostly in line. SingTel released its 1Q11 results this morning, with revenue up 11.5% YoY at S$4289.0m; but revenue fell 4.1% QoQ and was also about 3.8% below our estimate, mainly hit by seasonally lower IT and Engineering revenue from NCS and a weaker AUD QoQ. Net profit eased 0.2% YoY to S$943.2m; however, it fell 7.1% QoQ, again due mainly to seasonal factors and lower associate contributions (down 17.8% YoY and 6.9% QoQ); but it was just 1.6% shy of our forecast, as overall EBITDA margin was relatively steady at 29.3%, versus 29.9% in both 1Q10 and 4Q10.

Review of Singapore operations. Mobile revenue grew 13.7% YoY and 3.6% QoQ, driven by increased overseas travel and tourist arrivals; monthly blended APRU also increased further to S$53, up from S$51 in 4Q10, thanks to strong demand for smartphones and higher mobile data usage. While NCS contribution was down 29% QoQ (+6.1% YoY), SingTelalludes to revenue recovery given several major contracts that NCS has won recently. More details were also given for its mio TV segment, which saw a 15% QoQ jump in subscribers to 220k, fuelled by the World Cup and BPL offers; estimated ARPU came in ~S$63.6 but this may have been boosted by one-off World Cup pricing. Overall operational EBITDA margin came in at 38.2%; but it is keeping its 35% guidance for FY11 due to an expected hike in content cost from BPL and NBN initiatives.

Review of Optus and associates. Overall operating revenue grew 2.6% YoY (+1.0% QoQ), driven largely by its mobile business, which rose 6.7% YoY (+1.9% QoQ); it now contributes around 63% versus 60.7% a year ago. Overall EBITDA margin inched up to 24.5% from 23.0% in 1Q10 but still lower than 27.3% in 4Q10 due to seasonality. For the rest of FY11, SingTel has also kept its guidance unchanged.

Associates’ contribution fell 17.8% YoY and 6.9% QoQ; SingTel has kept its guidance largely unchanged except that it now expects Telkomsel’s operating revenue to grow at single-digit (versus high single-digit previously).

Easing fair value to S$3.34. In view of the likely lower associate contribution, we pare our FY11F earnings by 10.3% (FY11F by 6.5%). Although our valuations for its Singapore and Australia businesses are largely unchanged, the softer outlook for both Telkomsel and Bharti will reduce our SOTP fair value from S$3.40 to S$3.34. But as the total return is still over 10%, we maintain our BUY rating.

Easing Fair Value to S$3.34

1Q11 results mostly in line. SingTel released its 1Q11 results this morning, with revenue up 11.5% YoY at S$4289.0m; but revenue fell 4.1% QoQ and was also about 3.8% below our estimate, mainly hit by seasonally lower IT and Engineering revenue from NCS and a weaker AUD QoQ. Net profit eased 0.2% YoY to S$943.2m; however, it fell 7.1% QoQ, again due mainly to seasonal factors and lower associate contributions (down 17.8% YoY and 6.9% QoQ); but it was just 1.6% shy of our forecast, as overall EBITDA margin was relatively steady at 29.3%, versus 29.9% in both 1Q10 and 4Q10.

Review of Singapore operations. Mobile revenue grew 13.7% YoY and 3.6% QoQ, driven by increased overseas travel and tourist arrivals; monthly blended APRU also increased further to S$53, up from S$51 in 4Q10, thanks to strong demand for smartphones and higher mobile data usage. While NCS contribution was down 29% QoQ (+6.1% YoY), SingTelalludes to revenue recovery given several major contracts that NCS has won recently. More details were also given for its mio TV segment, which saw a 15% QoQ jump in subscribers to 220k, fuelled by the World Cup and BPL offers; estimated ARPU came in ~S$63.6 but this may have been boosted by one-off World Cup pricing. Overall operational EBITDA margin came in at 38.2%; but it is keeping its 35% guidance for FY11 due to an expected hike in content cost from BPL and NBN initiatives.

Review of Optus and associates. Overall operating revenue grew 2.6% YoY (+1.0% QoQ), driven largely by its mobile business, which rose 6.7% YoY (+1.9% QoQ); it now contributes around 63% versus 60.7% a year ago. Overall EBITDA margin inched up to 24.5% from 23.0% in 1Q10 but still lower than 27.3% in 4Q10 due to seasonality. For the rest of FY11, SingTel has also kept its guidance unchanged.

Associates’ contribution fell 17.8% YoY and 6.9% QoQ; SingTel has kept its guidance largely unchanged except that it now expects Telkomsel’s operating revenue to grow at single-digit (versus high single-digit previously).

Easing fair value to S$3.34. In view of the likely lower associate contribution, we pare our FY11F earnings by 10.3% (FY11F by 6.5%). Although our valuations for its Singapore and Australia businesses are largely unchanged, the softer outlook for both Telkomsel and Bharti will reduce our SOTP fair value from S$3.40 to S$3.34. But as the total return is still over 10%, we maintain our BUY rating.