Profit fall puts pressure on Bharti to wrap up Zain deal

Bharti Airtel’s first profit fall in three years puts more pressure on India’s top mobile operator to quickly integrate its US$9 billion purchase of Kuwaiti Zain’s African assets to cope in a cut-throat market.

Bharti, 32 per cent owned by Singapore Telecommunications, has been caught in a margin-destroying price war with Reliance Communications and other rivals in the world’s fastest-growing and arguably the most competitive market.

In a sector that is signing up 16 million wireless users on average each month and counts overseas players such as Vodafone, NTT DoCoMo and Telenor, call rates have pummelled to as low as 0.7 US cents per minute.

‘The humungous competitive activity to increase market share is only going to increase in the near future before it leads to consolidation in the sector,’ said Rakesh Rawal, head of private wealth management at Anand Rathi Financial Services. ‘Bharti is a long-term play and it remains to be seen how it will use its overseas presence to boost earnings growth.’

Last year, Reliance Comm and Bharti were the only two stocks to fall in the 30-share Bombay Stock Exchange index, which rose 81 per cent. So far this year, Bharti is down 9 per cent and Reliance Comm has lost 2 per cent in a steady market. Bharti posted a worse-than-expected 8 per cent drop in January- March profit, its first fall in profit since it began reporting under US GAAP in 2006-2007.

Sanjay Kapoor, chief executive of Bharti’s South Asian operations, said: ‘The propensity (for call charges) to drop any further on financially sound grounds is not there.’

In March, Bharti struck a US$9 billion deal to buy telecoms operations in 15 African countries from Zain, and expects to become the world’s No 5 mobile firm.

The deal by Bharti, which dominates India’s mobile market with about 128 million subscribers in the country’s 580 million users, comes after two failed attempts to finalise tie-ups with South Africa’s MTN.

Chairman Sunil Mittal said in a statement Bharti was working towards a closure of the Zain transaction at the earliest but the company had not set a time frame.

The Zain deal must be approved by regulators and governments in at least two of the African markets have weighed in against the deal. There is also a dispute about minority ownership of Zain’s operations in Nigeria.

Bharti’s net profit fell 8 per cent to 20.55 billion rupees (S$633 million) under the US accounting standards in its fiscal fourth quarter.

Revenue rose 2 per cent to 100.56 billion rupees. A Reuters poll of 12 brokerages had forecast a net profit of 20.78 billion rupees on revenue of 98.15 billion rupees.

Average revenue per user fell 28 per cent to 220 rupees as more than half of the new users were from rural areas, where the average talktime is lower than their urban counterparts.

Adds 45k Pay TV subscribers

Adds 45k Pay TV subs. SingTel has added another 45k Pay TV subscribers over the last four months, growing its mio TV base from 155k to 200k, an increase of 29%. As a recap, SingTel now holds the exclusive broadcast rights for the widelyfollowed Barclays Premier League (BPL) 2010-2012 seasons; SingTel has scored another coup over StarHub by securing the exclusive broadcast rights to a suite of sports networks and services from ESPN STAR Sports (ESS) from mid-2010. As the deals were secured before the recent Pay TV revamp in Mar, these will only be transmitted via SingTel’s mio TV setup.

Little impact on FY10 numbers. Despite the sharp jump in new Pay TV adds, we do not expect them to have any impact on FY10 numbers. We believe that the bulk of its new subscribers may be paying nothing until the actual broadcast of the BPL in Aug 2010; the ongoing promotion for its mio TV also offers the free broadcast of the 2010 Champions League and Europa League matches. For home subscribers, SingTel is charging a monthly subscription of S$23 (before GST) for BPL and for S$2 more, they can get additional ESS channels. We understand that commercial subscribers will need to pay around S$598 (before GST) per month. As such, we are likely to see the full impact of its increased Pay TV subscriber base in its 3QFY11 results (ending Dec 2010).

4QFY10 results likely to be upbeat. Having said that, we still expect its 4QFY10 results – likely due out by mid-May – to be fairly upbeat as per its guidance for FY10; SingTel had earlier guided for its Singapore operational EBITDA to grow at low single-digit level and for its Australia operating revenue and EBITDA to grow at low single-digit levels; SingTel expects both Bharti and Telkomsel (its two largest contributors) earnings to grow in local terms, although it notes that ordinary dividend will be lower. For 4QFY10, we expect net profit to come in around S$673.2m on revenue of around S$3391.3m; for FY10, we estimate that SingTel will post revenue of S$15791.6m and net profit of S$3565.3m.

Maintain BUY. With its FY10 results due soon, we hold off revising our FY11 estimates; but we remain upbeat about its prospects on the back of a likely faster-than-expected recovery in its associate earnings and opportunities presented by the NBN. As such, we maintain our BUY rating and S$3.51 fair value.

SingTel’s pay-TV subscriber base hits 200,000

SINGAPORE Telecom has scored another 45,000 pay-television customers in the past four months as the lure of premiership football continues to draw viewers to its camp.

SingTel said yesterday that its mio TV subscriber base has grown to 200,000 – 29 per cent up from 155,000 customers at the end of last year.

This is the fastest pace of growth since SingTel introduced its Internet-based mio TV service in July 2007. It also suggests that SingTel’s bold bid for Barclays Premier League (BPL) broadcast rights could be game-changing in the pay-TV stakes.

Despite SingTel’s recent gain, rival StarHub still has a comfortable lead with more than 500,000 cable TV subscribers.

SingTel outbid StarHub to score the exclusive right to broadcast the 2010 to 2013 seasons of the BPL. The win sparked a public outcry over having to pay for two pay-TV subscriptions as well as the hassle of having two incompatible set top boxes.

SingTel’s generous BPL bid also reportedly raised Fifa’s price expectations for the upcoming World Cup broadcast rights and contributed to the current impasse.

SingTel and StarHub are still trying to score an injury-time goal to screen the coveted tournament here.

Big But Valuation Unattractive

Singapore – Dominance in corporate data eroded. SingTel dominance in corporate data services, which accounted for 25.6% of revenue from Singapore operations, will be challenged due to open access provided by Next Gen Nationwide Broadband Network (NGNBN). NGNBN provides superior performance with speed of up to 1Gbps. We believe corporate customers will be enticed by NGNBN-based services, which are likely to be more competitively priced as wholesale prices from NGNBN are fixed and transparent. The government, for example, has already decided to utilise NGNBN for a substantial portion of its requirement for telecoms services.

Australia – Optus could benefit from structural changes. The Rudd administration plans to set up a National Broadband Network (NBN) providing broadband speed of up to 100Mbps for 90% of Australians and structurally separate Telstra's wholesale network and consumer businesses. However, the government needs Telstra's cooperation and passive infrastructure to reduce the hefty cost of rolling out NBN. There is uncertainty over whether Telstra could solicit concessions from the government by cooperating on NBN. Legislative processes to reform regulations could also be protracted.

Regional mobile associates – facing headwinds. Bharti Airtel faces intense competition in India, which is expected to persist due to more new entrants, such as Telenor's Unicor and Etisalat's STEL. The impending acquisition of Zain Africa is also expensive at EV/EBITDA of 9.2x and is funded by huge additional borrowings of US$8.3b. Telkomsel faces slower growth in Indonesia while competitors Indosat and XL Axiata have been revitalised after change of controlling shareholders and revamp of management teams.

Downgrade to HOLD. We cut our earnings forecast for FY11 and FY12 by 1.9% and 3.9% respectively due to fluctuations in exchange rates and lower contributions from Bharti Airtel. We value SingTel at S$3.06 based on sum-of-the-parts, thus providing limited upside. We estimate SingTel's FY11 free cash flow yield at 6.6%, lower than 11.1% for M1 and 9.3% for StarHub. Our preferred picks for the sector are M1 and StarHub. Downgrade from BUY to HOLD. Entry price is S$2.55.