Weak across the board

• Below expectations. Annualised 1HFY09 core net profit was 5% and 15% below our estimate and consensus expectations respectively, as we had flagged earlier. This was due to a weaker A$, higher subscriber acquisition and retention costs (SARC), and weak associate contributions. 2QFY09 core net profit fell 7% qoq and 12% yoy to S$801m, within our expectation of S$800m-820m. SingTel declared a DPS of 5.6 cts, unchanged yoy and representing a 51% payout, in line with its policy of 40-60%. Its DPS is in line with our forecast of 11 cts for FY09.

• Weak across the board. Group EBITDA margins fell 2.3% pts qoq on sharply higher SARC, largely due to subsidies for the iPhone for both SingTel and Optus. Associate contributions fell 21% qoq predominantly due to Telkomsel’s weaker showing.

• Lowered guidance. As expected, SingTel guided down its expectations for FY09. Group revenue and EBITDA “will be negatively impacted by depreciation in the Australian dollar” compared with expectations of growth previously. Also, associate contributions will be lower yoy vs. low double-digit growth previously.

• Maintain Underperform. We are maintaining our forecasts and sum-of-the-parts target price of S$2.37 pending a conference call this morning. We expect to cut our FY09 estimates after the call. Reiterate UNDERPERFORM on the back of the weak results.

Earnings drag

Below expectations. In the second quarter to 30 Sep 08, revenue increased 5.3% to S$3.89b while underlying net profit slid 12.3% to S$801m. The bottom line came in below our expectations due to a confluence of negative factors – high acquisition and marketing costs for the iPhone 3G initiative, weaker regional currencies, lower earnings from Indonesia’s Telekomsel resulting from price competition and post-tax loss from Pakistan-based Warid Telecom. Taking away the impact of the depreciation in Australia and regional currencies, SingTel would have registered a fall of 5% in earnings, which would still have been lower than
our estimates.

Free cash flow and balance sheet still robust. Free cash flow inched up 1.1% to S$1.14b, with S$195m coming from Singapore, S$316m from Australia and S$629m from regional associates. Balance sheet strength remains. It has a net gearing of 26% and a Net debt/EBITDA of 1.1x.

Mobile numbers continue to grow. The Group’s customer base hit 216.7m, rising 37% YoY and 10% QoQ. Its six regional associates saw increases in their mobile clients by between 15-59%, with Bharti (+8.1m to 77.5m subscribers) and Telekomsel (+8.1m to 60.5m) leading the charge. There were also cheers for the Singapore operations on this front as it saw the biggest growth in recent years for its post-paid business. It had quarterly net adds of 76,000, thanks to aggressive marketing campaigns as well as strong take-up of iPhone 3G. With another 45,000 increase in pre-paid customers, SingTel Singapore grew its base to 2.9m, extending its lead with a market share of 45.9%. It was 44.7% a quarter ago and 40.3% a year ago.

iPhone, the margin muncher. Given that mobile subscriber acquisition and retention costs are expensed immediately upon activation, the iPhone 3G initiative had a dilutive impact on earnings and margins, hitting EBITDA by S$27m in Singapore and A$44m in Australia, which was in line with management’s guidance last week. EBITDA margins would have been 2.6ppt higher at 40.1% (against a reported 37.5%) in Singapore and 3.0ppt higher at 26.2% (23.2%) in Australia.

Regional business takes a big knock. The regional associates slumped 26% to S$461m as they fell victim to declining currencies vis-à-vis S$, as well as weaker performances from Telekomsel, Warid and Globe. Stripping off currency changes, the combined operations of the regionals would have been 16% lower. The associates have a considerable impact on the Group, given that they now account for 41% of Group EBITDA. Including the 31% contribution from Optus, SingTel’s overseas operations account for a significant 73% of EBITDA.

No more clear blue skies. SingTel expects its core markets in Singapore and Optus to grow its revenue and EBITDA. But the weaker A$ will have an adverse impact on the earnings for the Group. What will hit it further is the lacklustre performance of its regional associates. Telekomsel, in particular, saw pre-tax profit slump 40% (in S$ terms) to S$113m. In our recent note where we downgraded SingTel, we had anticipated the associates’ to grow 3% in FY09, down from our earlier target of 9% growth. However, we are now expecting the associates’ contribution to be 15% lower compared to a year ago.

Earnings downgraded. As a result of the revised outlook, we have lowered our earnings by 9.5% from S$3.81b to S$3.45b (-12.3% YoY) in FY09 and 9.9% from S$4.12b to S$3.71b (+7.6% YoY) in FY10. We have also reduced our sum-of-theparts valuation from S$2.80 to S$2.67, mainly due to the bleaker forecast for its associates. Maintain NEUTRAL.

Regional Associates Take a “U” Turn

Story: Underlying net profit of S$801m (-12.4% y-o-y, -7.4% qo-q) was exactly inline with our expectations of S$800m. Assuming no forex change from 2QFY08, net profit would have declined 5% y-o-y. The result could disappoint the market, as street estimates suggest flat FY09 earnings versus our estimate of 7% decline y-o-y.

Point: We want to highlight four key points.

Singapore and Australia better than our expectations, despite adverse iPhone impact. Singapore EBITDA at S$500m was down 1.8% y-o-y only despite S$27m adverse impact of iPhone launch. Australia EBITDA at A$479m was up 0.4% y-o-y, despite A$44m adverse impact of iPhone launch.

Regional associates below our expectations. Associate contribution was down 25.5% y-o-y compared to our estimate of single digit decline. Assuming no forex change from 2QFY08, associate contribution would have been flat. What surprised us was Bharti’s pre-tax earnings contribution, down 5.1% y-o-y, against our expectations of 10% growth. SingTel has attributed the decline to S$57m fair value loss on Bharti’s foreign borrowings. We did not see this item in Bharti’s results and need to check with management on the disparity. The other associates were more or less in line with our expectations.

Maintained guidance for Singapore and Australia. Surprisingly, management maintained its guidance of EBITDA growth for Singapore and Australia. In our estimates, we have assumed Singapore EBITDA to be flat and Australia EBITDA to decline 1.5% y-o-y (AUD).

Lowered guidance for associates. Management lowered its guidance for associate pre-tax earnings contribution from “lowdouble digit growth” to “lower than last year”. In our estimates, we have assumed associate contribution to decline 3.8% y-o-y, which we think has downside risks.

Relevance: Maintain FULLY VALUED, with SOTP-based target price of S$2.34. We advise investors to accumulate SingTel towards our trough valuation of S$2.02. In our view, if forex rates stay at current levels, SingTel’s FY09F earnings could be 2%-3% lower than our current projections.

SingTel reports big subscriber gains in Q3

Growth reflects strong take-up of iPhone 3G and other initiatives

An exclusive bite at Apple’s iPhone 3G has helped put Singapore Telecom’s mobile subscriber base in the pink of health, with the operator chalking up the biggest subscriber gains in the third quarter of this year.

SingTel added 45,000 new post-paid mobile customers in Q3, more than twice as many as its two major rivals.

StarHub reported ‘net add’ of 17,000 new post-paid subscribers or users who sign up for a monthly call plan, while MobileOne added 4,000.

‘The growth in the number of post-paid mobile customers is the highest quarterly increase in recent years,’ SingTel said yesterday. ‘This reflected the strong take-up of the iPhone 3G as well as the success of targeted acquisition initiatives.’

SingTel launched Apple’s second-generation touch-screen handset with three dedicated subscription plans on Aug 22. StarHub and M1 were expected to follow suit by the end of this year but confirmed last week this will not happen because Apple is focusing distribution efforts on markets where the phone has yet to debut.

Since the iPhone 3G is only sold with a SingTel plan here, the company’s Q3 mobile statistics show that fewer than 45,000 units were sold a month into its debut. Apple forbids telcos from disclosing iPhone sales figures, but some industry watchers put the local volume around 60,000 so far.

Sales of the iPhone 3G may have lifted SingTel’s subscriber base in the Q3, but the victory was achieved at the expense of short-term profit. This is because the handset is sold with a heavy upfront subsidy which can only be recovered through long-term subscription and solid mobile data usage. SingTel warned last week that its Ebitda – earnings before interest, taxes, depreciation and amortisation – for local operations will be slashed by about $27 million as a result higher phone subsidies.

In Q3, the company added 76,000 new pre-paid customers on the back of strong demand among foreign workers, taking its total customer gain to 121,000.

On a regional level, SingTel, which reports its Q2 results today, said its combined subscriber base across its eight markets jumped 9.6 per cent sequentially to 216.7 million at end-September.

Indian associate Bharti recorded the biggest improvement, adding 8.1 million customers in Q3. Indonesian unit Telkomsel and Thailand’s AIS added 8.06 million and 810,000 subscribers respectively.

Philippine operator Globe reported a quarterly increase of 1.01 million customers, while Pakistani telco Warid and PBTL in Bangladesh enjoyed double-digit gains.

SingTel shares closed 6.4 per cent lower at $2.35 yesterday.

One more associate disappoints

Story: Globe Telecom’s 3Q08 net profit declined 22% y-o-y, which is significantly lower than our expectations of flat earnings. This is third consecutive quarterly disappointment from Globe, whose 9M08 profit has declined 9% yoy. We understand that Globe’s earnings are under pressure due to lower phone use among subscribers and intense competition in the sector. Globe contributes about 5.6% of SingTel’s earnings. As such adverse impact on SingTel’s full year earnings would be close to 0.5%.

Point: We want to highlight two key points. Disappointing numbers even if we ignore exchange rate. We expect SingTel to report 2Q09 underlying net profit of S$800m down 13% y-o-y on 12 Nov. Except Bharti, all the regional associates, along with Singapore and Australia operations are expected to be significantly below market expectations, even if we ignore the impact of unfavorable exchange rates.

Street too bullish but downside risks can weigh more. We anticipate street to start cutting SingTel’s earnings estimates after seeing 2QFY09 disappointment. Our FY09 and FY10 numbers are 12% and 16% below consensus respectively. If forex rates stay at current levels, SingTel’s FY09F earnings could be 2%-3% lower than our current projections. Every 10% decline in the AUD, INR or IDR should lower group earnings by c.2% each.

Relevance: Maintain FULLY VALUED, with SOTP-based target price of S$2.34. We advise investors to accumulate SingTel towards our trough valuation of S$2.02.