Will SingTel pull off another coup?

FOR its legion of shareholders, Singapore Telecommunications continues to keep faith – going by its latest quarterly results. The buoyant economy here and in the region has helped the telco deliver three straight quarters of double-digit sales growth as the momentum enjoyed by the juggernaut shows no sign of slowing down.

Bantering with some members of the media last week after posting the company’s third-quarter ended Dec 31, 2007, results, chief executive Chua Sock Koong said that with so many ’11 per cent’, it was hard to keep tab.

She was referring to the fact that group revenues grew strongly by 11 per cent to $3.83 billion, driven by an 11 per cent growth in the Singapore business to $1.25 billion and an 11.5 per cent rise to $2.58 billion in sales at Australian unit Optus.

Less than kind observers will say that well-managed large companies, particularly when they have the incumbent advantage, tend to do well when all is abuzz. Singapore grew a sterling 7.5 per cent in 2007 and created a record 237,000 jobs which drew in foreign workers likes bees to honey. SingTel, in particular, bagged the lucrative foreign worker mobile phone business.

At end-2007, SingTel Singapore’s 2.33 million mobile phone customers gave it a 41.46 market share.

The 600-pound gorilla should have little trouble meeting the supposedly momentous introduction of true number portability which will come in June. It is likely to be little more than an irritant for the telco which racks up billion-plus-dollar sales in a mere three months. Smaller rivals StarHub and MobileOne are likely to steer clear of overly aggressive tactics.

What, then, will exercise SingTel’s top managers in the months ahead?

Since Ms Chua took over the helm in April last year she has constantly given the same answer when asked where SingTel’s next acquisition is. Basically she said that SingTel’s focus remains in the region where it has significant know-how and it is also learning about new markets in Central Asia, the Middle East and Africa.

The best (relatively riskless) bet for SingTel would be to increase its stakes in several of the group’s associates which have contributed strongly to the bottom line and its burgeoning cash pile.

Associates made up 53 per cent of SingTel’s underlying net profit in the quarter under review. Cash dividends from them for the nine months to end-2007 was $1.02 billion, up 74 per cent from a year ago.

‘We have a strong balance sheet with significant flexibility for further investment,’ Ms Chua said last week.

At end-2007, total free cash flow was $2.65 billion, up 41 per cent.

The global financial market turmoil should lead to better priced opportunities. But telcos are unlikely to come cheap as it is one industry which is pretty recession-proof, said M1 chief executive Neil Montefiore last month.

SingTel’s three best performing associates – Indonesia’s Telkomsel, India’s Bharti and Thailand’s AIS, all No 1 operators in their respective countries – were acquired in the aftermath of the Asian financial crisis. As was Australian unit Optus.

Now if only SingTel could pull off a similar coup this time round as the world stands on the cusp of a slowdown. Still, its million shareholders who have grown used to the group’s stream of healthy payouts should sleep easy, bear markets notwithstanding.

Affirms FY08 guidance, upgrade to BUY

Cost pressures remain in 3Q08. Singapore Telecommunications Ltd (SingTel) reported a decent set of 3Q08 results. Revenue rose 11.4% YoY (+3.9% QoQ) to S$3,825.0m, driven by revenue growth of 11% in the Singapore business and the A$ appreciation of nearly 8%, although PATMI slipped 4.2% YoY and 3.7% QoQ to S$952.3m. However, underlying profit jumped 21.7% YoY and also inched up 2.2% QoQ to S$931.4m, once we exclude the exceptional items, albeit off the 5.2% QoQ pace seen in 2Q08. Operational EBITDA rose 7.5% YoY and 1.1% QoQ to S$1,135.5m, but margins have come off further to 29.7% in 3Q08, versus 30.4% in 2Q08 and 30.8% in 3Q07, no doubt reflecting continued cost pressures in Singapore and Australia as we had expected.

Associates did better in 3Q08. In addition, we also saw good growth from its regional associates, where their collective pre-tax contribution grew 31.2% YoY and also 4.8% QoQ. This time around, the star performer was Globe Telecom in Philippines, which saw pre-tax profit surged 55.5% YoY and 14.1% QoQ to S$81.0m, boosted by both a 7% appreciation in the PHP against SGD and also robust subscriber growth. For the quarter, SingTel also saw a sharp 53% YoY (+11% QoQ) jump in its mobile subscribers to hit 171.5m, with the bulk coming from its latest investment in Pakistan’s Warid Telecom. Management expects to continue to aggressively grow its network and customers there, as it is a market with low penetration rate.

Affirms its FY08 guidance. Going forward, management also affirmed its previous FY08 guidance and continues to expect revenue from Singapore to grow at single-digit rate and Australia to grow along with the market, with pre-tax earnings growth from its regional mobile business at doubledigit level. And as the 9M08 revenue of S$9,992.8m (+10.9%) already met 83.2% of our FY08 estimate and the underlying profit of S$2,712.9m (+16.3%) met 80.4% of our forecast, we are bumping up our estimates by around 4.4%. However, we have left our FY09 estimates largely unchanged, as margin compression and high acquisition/retention costs may negate subscriber growth.

Upgrade to BUY. In line with its better operational performance, we have also revised up our fair value from S$3.91 to S$4.35. As there is now nearly 11.6% upside from here, we upgrade our call to BUY.