SingTel eyes acquisitions, higher stakes in partners

SINGTEL is on the lookout for acquisition opportunities and – as usual – is keen to raise its stakes in regional associates. ‘We are in a very strong financial position that will put us in a good position to look for acquisition opportunities,’ said group CEO Chua Sock Koong. ‘But clearly, we are not in a big rush to make acquisitions, given the global uncertainties.’

SingTel has always been keen to raise its stakes in regional associates, she added. But this is on a willing buyer-seller basis and terms that are acceptable to each side. ‘If an opportunity does arise, we will look at it seriously,’ Ms Chua said.

Also at SingTel’s third quarter results briefing yesterday, SingTel International CEO Lim Chuan Poh told reporters the group will not pick up cheap assets that have no strategic value and it remains focused on the Asia-Pacific region.

So far, not all of SingTel’s overseas ventures have borne fruit. Pakistan’s Warid and Bangladesh’s PBTL suffered bigger losses in the December quarter, due to to fair value losses. But SingTel said it remains committed to its investments in these operators and will try to improve their performance.

SingTel’s Q3 net profit slides 16% to $799m

It is feeling the impact of the global downturn; affirms FY09 guidance

by weaker regional currencies, Singapore Telecommunications posted a 16 per cent fall in net profit from a year ago to $799 million for the third quarter ended Dec 31, 2008.

It is starting to feel the pinch of the global downturn and affirmed its outlook for the fiscal year ending March 31, 2009 – that overall pre-tax earnings contributions of the regional mobile associates will be lower than the previous year.

Still, SingTel noted that Q3 was ‘one of its best quarterly performances’, with double-digit revenue growth in Singapore and Australia despite the difficult environment.

The group’s Q3 net profit – which took into consideration the group’s share of a $44 million exceptional loss on the non-cash impairment charge of a unit of Thai associate Advanced Info Service PCL – was also higher than the average $770 million forecast by four analysts polled by Reuters.

SingTel’s group operating revenue dipped 3.2 per cent to $3.7 billion, hurt by the Singapore dollar’s strength against the currencies of overseas markets in which its associates operate.

In particular, the Australian dollar suffered a steep 23 per cent decline against the Sing dollar from a year ago. Had the Aussie dollar remained stable, the group operational revenue could have grown 14 per cent, SingTel said.

Its group operational Ebitda (earnings before interest, taxes, depreciation, and amortisation) for Q3 fell 6.9 per cent to $1.06 billion while underlying net profit slipped 10.1 per cent to $838 million.

Operating revenue from its Singapore business grew 21 per cent to a record $1.51 billion in Q3, bolstered by first-time inclusion from newly acquired Singapore Computer Systems while fully owned Australian subsidiary Optus delivered a 10 per cent growth in operating revenue to A$2.2 billion (S$2.21 billion).

Pre-tax profit contributions from associates in Q3 fell 24 per cent to $486 million, hit by the depreciation in regional currencies.

‘The economic slowdown has started to impact the group,’ said group CEO Chua Sock Koong.

But she noted that SingTel is no novice in managing downturns. It is in a strong financial position to strengthen its market presence through customer-focused products and greater cost efficiencies.

It will soon be rolling out the Google phone known as HTC Dream in an exclusive tie-up, almost six months after its launch of Apple’s 3G iPhone, to target a different audience.

‘We will come up with significant differentiators when we launch the product,’ said Allen Lew, CEO Singapore.

Telkomsel will soon be launching the iPhone after winning the licence from Apple to distribute the handset in Indonesia.

As it will not be offering subsidies for the handsets unlike SingTel and Optus, there will not be an upfront margin erosion or earnings dilution, said Lim Chuan Poh, CEO SingTel International.

SingTel had incurred hefty upfront subsidy costs in its fiscal Q2 in a bid to boost take-up of the iPhone in Singapore by reducing the handset retail price.

With an eye on managing costs, Ms Chua said the group has reduced discretionary spending, sought to improve staff productivity, and undertaken offshoring of call centre services in Australia. Job cuts remain a last resort and the group would first decide to trim variable pay if necessary.

For the nine months ended Dec 31, the group’s operating revenue grew 2.5 per cent to $11.37 billion and net profit slipped 11.2 per cent to $2.55 billion. The group generated free cash flow of $2.27 billion and net debt gearing ratio as at Dec 31 was 25.5 per cent.

Yesterday, SingTel’s share price put on 2.1 per cent or five cents to $2.48.

Strong operational turnaround

• A little ahead of expectation. Annualised 9MFY09 core net profit was 1% above ours and 2% below consensus due to stronger-than-expected performance at SingTel Singapore and Optus. 3QFY09 core net profit rose 5% qoq but fell 10% yoy to S$838m, ahead of our expectation of S$760m-790m. Key takeaways:

• Strong operational turnaround. Revenues in local currency at both SingTel Singapore and Optus surged 13% qoq and 6% qoq respectively on the back of strong subscriber growth. The 19% qoq decline in the A$ resulted in a 14% qoq dilution in revenue in S$ terms for Optus. Group EBITDA margin rose 1.2%-pts after very weak margin in 2QFY09 when subscriber acquisition and retention costs (SARC) surged due to iPhone subsidies. We believe their aggressive subscriber acquisition efforts of previous quarters are bearing fruits with revenues kicking in.

• Associates weighed down by “fair value losses”. Associate contribution rose nudged 5% qoq due to: 1) the 10% and 5% qoq depreciation of the Indonesian rupiah and Indian rupee against the S$; and 2) fair value losses of S$28m by Telkomsel from foreign currency denominated vendor payables as a result of the weaker rupiah, and S$21m by Bharti on its US$ and Yen denominated borrowings.

• Guidance maintained. SingTel maintained its guidance, which we view positively as it signals no further deterioration in outlook.

• Neutral on industry consolidation in Australia. We are neutral on the consolidation of Vodafone and Hutchison Australia on Optus. While a larger and stronger operator will emerge, it removes an aggressive fourth player (Hutchison) which had been price-disruptive from the market.

• Maintain OUTPERFORM on SingTel with a SOP-based target price of S$3.10 on the operational improvement/turnaround in Singapore and Australia, stabilising regional currencies, strong qoq results among its key units, namely Telkomsel and Bharti.

Inline results, worries ahead

SingTel reported underlying net profit of S$838m (-10.1% y-o-y, +4.6% q-o-q) exactly inline with our estimate of S$835m, which we had highlighted in SingTel’s earnings preview on 30 Jan. The key variances were (i) Singapore performed slightly better than our expectations with sequential improvement in both topline and margins; (ii) Regional associate’s post-tax contribution was lower than our expectations due to worse performance of Telkomsel. While risk to associate growth has materialized already, going forward, with SingTel having the majority market share of corporate customers in Singapore, we believe that Singapore earnings could be at risk if corporate cut spending to save costs.

Tax savings on dividends resulted in sequential improvement. 3Q09 benefited from the absence of tax on dividends to be recognized from associates (S$33m tax in 2Q09F), resulting in sequential improvement in profit. We think, consensus did not factor in this tax savings, which could be the reason that consensus estimates of S$790m, seen on the Bloomberg, is lower than the actual underlying net profit. However, our FY09 and FY10 earnings estimates are 3% and 5% below consensus estimates respectively.

Lower sequential contribution from associates due to Telkomsel. Telkomsel’s post-tax contribution was down 51% y-oy and 23% q-o-q, mainly due to high competition and partly due to weaker IDR (12% y-o-y and 10% q-o-q). While we expect some improvement in Telkomsel’s contribution going forward sequentially, we do not expect Telkomsel to return to the positive growth territory, on an annual basis in FY10.

Our FY09 and FY10 estimates are 3% and 5% below consensus estimates respectively. Maintain FULLY VALUED, and SOTP-based target price of S$2.52. Key risks are (i) lower corporate spending in Singapore where SingTel has a majority market share, (ii) weak performance of associates as disposable income is impacted in their countries, (iii) lower growth for Bharti, if Rcom continues with aggressive pricing on GSM network, (iv) exchange rate risks, and (v) potentially higher capex in Australia, implying short-term funding issues.

SingTel mobile subscribers growing

Group customer base up 35% year on year, with S’pore base up 26%

DEFYING weak market conditions, Singapore Telecommunications posted sturdy growth in both local and regional mobile subscribers last year.

Its combined regional mobile customer base (including for Singapore) reached 232 million as at Dec 31, 2008, a jump of 35 per cent or 61 million from a year ago, South-east Asia’s largest teleco said. This was a 7.3 per cent increase from a quarter ago.

For Singapore itself, the number of mobile subscribers grew 26 per cent from a year ago to 2.94 million at the end of 2008.

Of the 68,000 new mobile customers added during the quarter to Dec 31, 2008, 30,000 were postpaid net additions with continued good take-up of the Apple iPhone.

SingTel said the the demand for third generation (3G) services in Singapore remains strong. In the calendar fourth quarter, 71,000 3G mobile subscribers were added, bringing the total 3G subscriber base here to 1.14 million by end-2008.

Elsewhere, the group’s regional associates also reported strong growth in customer base.

‘Despite stiff competition in their home markets and the global economic crisis, the six regional associates continued to post double-digit customer growth of between 13 per cent and 55 per cent compared to a year ago,’ SingTel said in a statement.

Bharti, SingTel’s Indian associate, posted the biggest jump in customer numbers among the associates. Its mobile base jumped 55 per cent year-on-year and 11 per cent quarter-on-quarter to 85.7 million customers. Its net addition of 8.2 million mobile customers in the quarter ended Dec 31, 2008 was also its highest-ever quarterly growth.

Optus, SingTel’s wholly owned Australian unit, expanded its mobile customer base by 9 per cent from a year ago to 7.63 million as at Dec 31. It attracted 213,000 new customers in the quarter, reflecting the success of its innovative services and plans, together with its expanded distribution channels and 3G network.

Indonesian associate Telkomsel’s total mobile customer base grew 36 per cent year-on-year to 65.3 million at end-2008. It added 4.8 million customers during the quarter, thanks to the re-launch of the popular mobile subscription plan simPATI PeDe in the preceding quarter. Even the more mature markets of Thailand and the Philippines saw year-on-year growth of 13.4 per cent and 21.6 per cent in mobile subscribers at AIS and Globe respectively. Pakistan associate Warid and PBTL in Bangladesh also posted double-digit growth in mobile customers from a year ago.

SingTel is announcing its fiscal third quarter ended Dec 31, 2008 this morning.

CIMB-GK is expecting its core net profit to further decline to $760-790 million from $801 million in fiscal Q2, while DBS Vickers expects SingTel to report underlying net profit of $835 million, a 10 per cent decline from a year ago but a 4 per cent increase from the preceding quarter.