Associate and iPhone subsidy dampener

2QFY10 results preview

We expect SingTel to register a small 0-3% qoq decline but up 14-18% yoy in 2QFY10 core net profit of about S$915m-945, which is scheduled to be released on 11 Nov 09. This is below consensus’s S$976m. The expected key features of the results are: 1) a weaker contribution from Bharti due to competition in India and interest expense at Telkomsel, despite stronger currencies; and 2) weaker margins at SingTel Singapore and Optus due to subsidies on the iPhone 3GS. The robust yoy growth is due to a low base when Singapore and Optus succumbed to higher iPhone subsidies and Telkomsel was affected by competition. All in, the results cold come below our FY10 estimate, which has downside risk due to Bharti. We maintain UNDERPERFORM on SingTel, with a SOP-based target price of S$3.10. Likely de-rating catalysts are mounting competition in India and Australia. Switch to M1 or Axiata.

The details

Bharti disappointed. SingTel’s largest associate Bharti which contributes 21% to its estimated FY10 PBT was affected by competition. For the first time in memory, Bharti’s topline contracted as it fell -1.0% on a qoq basis pulled down by a 1.6% qoq fall in mobile revenue. The ARPU reduction was particularly acute in 2Q as it shrunk 9.4% qoq, the highest level in the last three years. We think this is just the start of more bad news to come.

While Telkomsel turned in a commendable operating performance with EBITDA growing 7% qoq, this was dampened by higher interest expense as the company geared up. All in core net profit was flattish qoq.

iPhone subsidies in Australia and Singapore. We expect margins of both Optus and SingTel Singapore to come under pressure from the iPhone 3GS subsidies, which was launched in end-June and mid-July respectively. Their margins declined 2.9% pts and 2.0% pts respectively in 2QFY09 when the iPhone 3G was launched. However, we do not think their margins will be as substantially impacted by the 3GS as the pentup demand appears to be less.

Currencies in SingTel’s favour. The regional currencies generally favoured SingTel. The Aussie dollar and Indonesian rupiah strengthened 6% and 3% respectively against the Sing dollar, while the Indian rupee weakened 2% during the quarter. 

Valuation and recommendation

Maintain UNDERPERFORM despite the recent correction in its SingTel’s share price due to our concerns over its ability to recover the Barclays Premier League cost and the rising competition within both India and Australia. We maintain our earnings forecast for SingTel until the release of its 2Q results but we are likely to cut our it for Bharti due to mounting competition. There is no change to SingTel’s SOP-based target price of S$3.10 for now. M1 remains our top Singapore telco pick. For regional exposure, we prefer Axiata.

Resorts World Sentosa places $21m bet on SingTel

RWS is one of the first corporate backers of SingTel’s pay-TV service

SINGAPORE Telecom’s corporate pay-TV ambitions got a boost yesterday from a $21 million deal to provide a multimedia entertainment system and other technology services to Genting Singapore’s Resorts World Sentosa (RWS).

Under the seven-year contract, the operator will equip all 1,800 rooms at the integrated resort’s six hotels with an in-room entertainment system and high-speed wireless Internet.

Guests will be able to surf wirelessly and access computer games, music and content from SingTel’s mio TV service.

RWS is one of the first corporate backers of the operator’s fledgling pay television service, which until recently has been offered to consumers only.

Businesses such as hotels, restaurants and pubs are central to SingTel’s pay-TV strategy, as they could be more lucrative than the consumer segment. Having paid a premium for the English Premier League (EPL) broadcast rights, SingTel also needs to tap the corporate segment to help recoup costs.

SingTel previously told BT it has conducted in- house trials to see how it can deliver mio TV content such as the EPL to business customers.

Besides wireless Internet and multimedia entertainment, SingTel will also deploy a location-based mobile advertising service for RWS.

This will allow guests to receive text and multimedia messages when they are near pre-defined locations. For example, a customer might receive an electronic dining coupon via their mobile phone when they are walking towards a particular restaurant.

The multi-million dollar contract also includes a system to manage and track RWS’ fleet of limousines.

Stronger S$ to mute overseas earnings growth in 1HFY10

• We expect SingTel Ltd’s (SingTel) upcoming 2QFY10 (YE March) and 1HFY10 results to be muted by the strength of the Singapore dollar (S$) against most regional currencies.

• Telco earnings from overseas made up 64% of SingTel’s 1HFY09’s net profit of S$1.75bil. Significant contributors are wholly-owned Optus in Australia with 18%, 30.4%-owned Bharti Airtel in India with 23% and 35%-owned Telkomsel in Indonesia with 16%. Rest comprises 21.4%-owned AIS in Thailand, 47.3%-owned Globe Telecom in the Philippines, and to a negative extent from losses at 45%-owned PBTL in Pakistan and 30%-owned Warid Telecom in Bangladesh.

• Growth in 2QFY10 earnings for SingTel on YoY comparison will be dampened, as movements in the S$ ranged as such: +1% against A$, +5% against Indonesia Rupiah, +7% against Indian Rupee, +3% against Philippine Peso and -3% against Thai Baht.

• For SingTel’s 1HFY 10, dampening effect on growth YoY will be felt more, as movements in the S$ in 1HFY10 over 1HFY09 ranged as such: +7% against A$, +5% against IDR, +8% against INR, +3% against PhP and -2% against THB.

• But better 1HFY10 performances at Telkomsel and Bharti will save the day. Off a depressed April-September performance last year, Telkomsel enjoyed a robust 34% YoY growth for April-September 2010 and net profit of IDR 7,243bil (S$1bil). Due to a weaker 2QFY10, Bharti’s 1HFY10 net profit grew 20% YoY to INR 48,883bil (S$1.5bil).

• Flipside, a QoQ comparison shows up best for its overseas telco contributions. S$ is mostly softer: -6% against A$, -3% against IDR, about flat against INR and THB, and +3% against PhP.

• In particular, the translation effect will not worsen contribution from Bharti’s weaker 2QFY10 further. While Bharti has reported 16% YoY net profit growth for 2QFY10 to INR 23.7bil, this represented a fall of 6% over 1QFY10.

• We expect 2QFY10 as well – to be the weakest quarter at Optus, in similar vein to operations in Singapore, mainly due to upfront costs for launch of new model iPhone 3GS (a repeat of last year’s trend). Thankfully, the 6% depreciation in S$ will help boost Optus’s contribution.

• On a HoH comparison, 1HFY10 earnings will show a stronger pick up over 2HFY09 as the S$ trended as such: -16% against A$, -6% against IDR, +1% against INR and THB and +3% against PhP.

• All that said, we expect SingTel to report 1HFY10 net profits of at least S$1.9bil. SingTel is scheduled to release results next week – 11 November.

• On a separate note, SingTel will increase its 30.43% stake in Bharti Airtel to 31.95% on 12 November 2009, at a consideration that will range from Indian Rupee 18.1bil to – 30.1bil. Increase represents a 1% boost to SingTel’s earnings.