FY2010 Results

• FY2010 revenue of S$16,871m, net profit of S$3,907m

• Strong performances by Singapore and Australian operations as well as regional mobile associates

• Maintain buy recommendation with fair value reduced from S$3.52 to S$3.43

FY2010 Results

SingTel reported FY2010 operating revenue of S$16,871m (+13.0% y-y) and net profit of S$3,907m (+13.3% y-y). Revenue was 0.2% below our estimate of S$16,906m while net profit was 1.8% above our forecast of S$3,837m. It announced a final dividend of S$0.08 per ordinary share in FY2010, which was higher than S$0.069 in FY2009. This brought the total dividend for FY2010 to S$0.142 compared to S$0.125 in FY2009.

The revenue from its Singapore operations increased by 8.1% to S$5,995m while the revenue from Optus rose by 7.5% to A$8,949m. Furthermore, the share of ordinary earnings from the regional mobile associates was better by 19.2% to S$2,420m.

FY2011E Outlook

SingTel expects the operating revenue for the Singapore and Australian businesses to grow at mid single-digit level. For its Singapore operations, it anticipates EBITDA to fall within low to mid single-digit range. Furthermore, it expects earnings from Bharti to be diluted by its acquisition of Zain and investment in 3G spectrums. Moreover, Telkomsel’s revenue is likely to grow at single-digit level with a slight drop in EBITDA margin. The earnings will continue to be affected by fluctuations in regional currencies.

Greater competition in Singapore and India

We expect SingTel to encounter greater competition in FY2011E. It mentions that it is spending more money to purchase content programs for mioTV so that it can attract a greater number of subscribers. Furthermore, there are connection costs to ensure that mioTV subscribers have access to set-top boxes. There will also be higher acquisition costs to ensure that it maintains its lead in the mobile and broadband market. Besides, IDD rates will drop due to more competition by other telecommunications operators. At the same time, we would like to highlight that Bharti faces stiff competition in the Indian mobile market and we project growth of only 2% in its revenue. As a result, we have reduced the earnings forecast by 5.6% 9.2% and 9.4% to S$3,972m, S$4,141m and S$4,179m in FY2011E, FY2012E and FY2013E respectively.

Maintain Buy recommendation and reduce fair value from S$3.52 to S$3.43

We believe that SingTel will be innovative and beat its competitors in the markets where it has an interest. In fact, we expect growth of 9.3% and 8.3% in the revenue for its Singapore and Australian operations respectively in FY2011E. However, for the regional mobile associates, we expect growth of only 2.7% in the share of profits to S$2,514m for FY2011E due to greater competition. We maintain our buy recommendation on account of SingTel’s competitive edge in many of the regional markets. As we have reduced our earnings estimates, the fair value has been reduced from S$3.52 to S$3.43 based on the discounted cash flow model.

Higher costs ahead

• SingTel’s FY10 EPS was in line with market consensus, though this was a marginal 2% below our estimates.

• The healthy 13% YoY growth in underlying net profit to $3.9bil was boosted by (1) 18% YoY jump in associate contribution to $2.4bil, and (2) 19% YoY surge in EBIT contribution from wholly-owned Optus in Australia to $1.3bil. Together, these accounted for 68% of group EBIT.

• Surge in Australia-Singapore dollar rate of 11% YoY played a big role, as Optus reported more moderate 8% YoY growth in local currency terms. In particular, 2HFY10 growth was largely driven by 27% YoY A$ appreciation, as A$/S$ had plummeted to parity levels in 2HFY09.

• But Optus also performed well at core operating level, driven mainly by mobile subscriber growth of 9% YoY to 8.5 million. Postpaid segment saw monthly net adds of 50,000, while ARPU inched up by $1 to $69/month. Emphasis on higher value iPhones and smartphones however, squeezed Optus’s EBITDA margins in 1Q to 3Q. But benefits from these higher value-added base led a recovery in 4Q, mitigating FY margin fall to 24%. Mobile accounts for more than 60% of earnings.

• At Associates, contribution from 35%-owned Telkomsel in Indonesia was the biggest driver; up 32% YoY led by core earnings recovery, while that from 32%-owned Bharti in India was up 13% YoY helped by fair value adjustment effects. Together, these made up 80% of Associates. Against S$, Indonesian Rupiah rose 2% while Indian Rupee fell 4%, on average YoY.

• EBIT at mature Singapore operations grew a modest 4% YoY. While topline growth (8% YoY) was buoyed by mobile postpaid and IT and engineering (+32% YoY) segments, these dampened EBITDA margin to 38% from 39% in FY09. Higher handset subsidies, higher mio TV content costs and lower typical IT margins were to blame. IT and engineering prospects is supported by a strong S$1.3bil order book and peak fibre rollout for OpenNet ahead.

• Overall, we lower forecasts by 3% – Management guides for mid-single digit core revenue growth, while EBITDA margin for Singapore will be squeezed to 35%. One key factor will be higher costs associated with its fledging pay TV business.

• Upside at associates will come from Telkomsel’s earnings, as well as an increase in associate dividend payout. Bharti’s earnings will be diluted by acquisition financing costs for Zain Africa BV and investment in 3G spectrum.

• Our fair value is fine-tuned slightly to $3.04 on DCF approach – we maintain HOLD. SingTel is raising FY10 DPS to 14.2 cents, with final DPS of 8 cents declared. Yield of 5% is decent but not overlycompelling.

Stormier weather overseas

Post-results conference call

Cutting forecasts and target price; maintain UNDERPERFORM. SingTel’s post-FY09 results conference did little to change our pessimistic view, except that we now believe dividend payouts will remain at the higher end of its policy given a lack of acquisition targets. We expect Singapore’s FY11 core net profit to decline 7% yoy on higher costs related to mio TV content and installation. Bharti and Telkomsel, which normally help lift earnings, face headwinds from soaring 3G spectrum costs and regulatory risks in India, and rising competition in Indonesia. We cut our FY11-12 core net profit estimates by 9-11% and sum-of-the-parts target price by S$0.30 to S3.00 on lower estimates for Singapore, Bharti and Telkomsel. Switch to M1 for exposure to Singapore telcos and Axiata for exposure to regional telcos.

Key takeaways

Lower margins in Singapore. SingTel expects its EBITDA to decline to low-to-midsingle digits yoy on the back of mid-single-digit growth in revenue. This is due to content cost pressures for mio TV (we believe referring largely to the football World Cup and Barclays Premier League rights), installation costs for mio TV and continued erosion of IDD margins to VoIP. On top of this, we believe more intense competition for subscriber acquisition and retention will push up subsidies, especially after M1 and StarHub secured the rights to resell iPhones.

Mio TV gaining momentum. SingTel added a record 36k (or +23%) mio-TV subscribers as consumers signed up for its early-bird promotions even before the start of the next BPL season. It also attributed the strong growth to its new content line-up for its video-on-demand service.

Higher capex on WBB at Optus. Optus is raising its capex in FY11 to A$1.2bn from A$1.0bn in FY10 mainly for its wireless broadband (WBB) infrastructure. It has been upgrading its backhaul, where average bandwidth has risen 3-5-fold from 1-2 E1 lines to 6-7 E1 presently. Each E1 provides 2Mbps of capacity. Despite the strong take-up of WBB, it has yet to see any migration away from fixed broadband.

Dividend payouts to remain high. SingTel said it benchmarks its dividend yields to those of Singapore blue chips and regional telcos. It continues to manage its balance sheet to maintain financial flexibility for possible acquisitions. Excluding Bharti’s earnings because the telco pays negligible dividends, SingTel’s dividend payout is 74%. We believe payout will remain at the top end of its policy of 45-60% given a dearth of sizeable acquisition targets. SingTel admitted that Bharti’s acquisition of Zain Africa has removed one of the last remaining targets available. Closer to home, Vietnam remains a possible acquisition target but progress by the authorities has been agonisingly slow, in our view.

Punitive recommendations by Indian regulator. Separately, the Indian telecom regulator (TRAI) has proposed a series of recommendations on spectrum and licensing:

• The most important recommendation is that operators with spectrum of more than 6.2 MHz would have to pay a one-time fee based on 3G prices. The excess spectrum in 900 MHz and 1800 Mhz bands will be charged at 1.5x and 1.0x the cost of 3G spectrum respectively. Operators holding spectrum in excess of 8 MHz will be charged 1.3x the 3G price. This amount would be pro-rated for the period of their licences, subject to a minimum of seven years. In the meantime, bids for an all-India 3G spectrum continue to soar, crossing the US$3.2bn mark or more than four times its reserve price.

• Secondly, upon expiry of the licences, the 900 MHz will be exchanged for 1800 MHz spectrum as TRAI plans to re-farm (reuse) the 900MHz band after its expiry. 3G prices will be adopted as the current price of spectrum in the 1800 MHz band.

• Thirdly, licences fees will fall 6% by FY14 from the current 6-10% but this would be offset by higher spectrum charges, which will range from 2.2% to 10% from 3-8% previously.

• Finally, in terms of M&As, the government has waived the 3-year lock-in period. However, any merged entity cannot exceed 30% in revenue and/or subscriber base from 40% before and the total number of operators cannot hold drop to fewer than six in any service area (from four before). The merged entity also cannot hold more than 14.4 MHz.

Bharti likely to be hard-hit. We believe Bharti would be among the most affected and the one-time fee for excess 2G spectrum is arguably the most punitive measure and could be the one drawing the most resistance. The media reported that TRAI estimates Bharti would pay about Rs 34.98bn (Rs9.2/share) from the one-time fee and after include cuts in licence fee, the net impact on Bharti is about Rs15bn (Rs3.9/share).

The cap on spectrum at 8 MHz for all service areas and 10 MHz for Delhi and Mumbai for GSM operators arguably makes securing 3G spectrum all the more critical, especially with operators having to return their 900 MHz in exchange for 1800 MHz upon expiry of their licences. On the flipside, the higher the 3G prices, the more operators would have to pay as they renew their spectrum. Finally, we do not think that the M&A norms have been sufficiently relaxed as the one-time fee beyond 6.2 MHz would deter consolidation and the 30% threshold for a merged entity precludes most of the leading operators from consolidating.

Lastly, bids for the 3G spectrum continue to soar, reaching US$3.33b. Coupled with its financing for Zain Africa, the cost of the 3G spectrum will put more strain on Bharti’s balance sheet.

Fat dividend caps robust SingTel quarter

Strong performance across the group boosts fourth quarter earnings by 12.4%

Singapore Telecommunications is rewarding shareholders with its highest dividend payout in two years after posting a better-than-expected 12.4 per cent increase in fourth-quarter net profit to $1.02 billion.

Southeast Asia’s largest telecom operator yesterday said a combination of favourable currency movements and stronger contributions from regional associates helped reverse the steep 17 per cent bottom- line decline it suffered in the same period last year.

SingTel’s fourth-quarter net income of $1.02 billion was higher than the $987 million average forecast of five analysts polled by Reuters.

The improvement was driven by strong performance across the group, SingTel group CEO Chua Sock Khoong told reporters at the telco’s results briefing yesterday.

Earnings per share for the three months ended March 31 was 6.38 cents, up 12.3 per cent from 5.68 cents in 2009. Revenue for the period climbed 25.4 per cent to $4.5 billion.

For its improved scorecard, SingTel is proposing a final dividend of 8 cents per share.

This brings its full-year payout to around $2.26 billion, or 14.2 cents per share. This is its biggest distribution since 2007 when it returned more cash to shareholders through a special payout.

For the last two years, the operator has been paying 12.5 cents per share. It paid 11 cents per share in 2007, excluding a 9.5 cent special payout.

SingTel, which derives 73 per cent of its Ebitda (earnings before interest, taxes, depreciation and amortisation) from overseas, saw pre-tax contributions from its six regional associates grow 11.7 per cent in the fourth quarter to $546 million.

The truce in Indonesia’s telco sector made Telkomsel the star performer in the fourth quarter, with its contributions rising 25.8 per cent to $205 million.

Share of profit from Indian operator Bharti, SingTel’s largest overseas investment, grew 8.6 per cent to $245 million, while contributions from Thailand’s AIS rose 4.6 per cent to $53 million.

Globe’s contribution fell 22.5 per cent in Q4 due to the double whammy of heightened competition and thinner margins as a result of more attractive mobile bundles.

SingTel’s remaining associates – Pakistani operator Warid and PBTL in Bangladesh – continue to be in the red with pre-tax losses of $14 million and $3 million respectively.

According to Lim Chuan Poh, CEO of SingTel International, the group is currently ‘exploring’ opportunities for consolidation in the Pakistani telco sector.

‘For Bangladesh, the potential exists for us to now be able to do something together with Bharti,’ he added.

This is because Bharti bought a 70 per cent stake in Warid Telecom, Bangladesh’s fourth-largest mobile operator, earlier this year and it could potentially derive cost efficiencies by working with SingTel’s local outfit PBTL.

‘Tower sharing and site sharing and all that will be the first path,’ SingTel group CFO Jeann Low added.

Optus, which accounts for 34 per cent of SingTel’s Ebitda, saw its net profit soar 43.6 per cent to $279 million in the fourth quarter due to the strengthening of the Australian dollar and a recent mobile subscriber boom.

Net profit for SingTel’s Singapore operations fell 16.8 per cent to $341 million in Q4 due to a higher mix of lower-margin IT and engineering revenue, as well as the costs of cellular network upgrades and pay-TV content acquisition.

For the full year, SingTel’s net income rose 13.3 per cent to $3.9 billion on the back of a 13 per cent revenue improvement to $16.9 billion.

Looking ahead to this financial year, SingTel warned that earnings from Singapore could fall as a result of incurring higher costs for supporting its mio TV rollout.

More and more Singaporeans are signing up for SingTel’s pay-television service after it scored the broadcast rights for the Barclays Premier League last year and this pushed its customer tally past the 200,000 mark last month.

Contributions from Bharti could also be lower due to the financing costs of its US$10 billion acquisition of the 15 South African mobile assets belonging to the Zain Group.

SingTel shares closed three cents lower at $2.97 yesterday.