Intense Competition: Limited Upside in Investing in Parent

Competition in the telecommunications sector has remained intense with the launch of Mobile Number Portability (MNP). Singapore Telecommunications (SingTel) and StarHub both continued their aggressive marketing activities with high mobile phone subsidies while offering six months free subscription to re-contract as well as secure new customers.

High marketing and promotional expenses expected to continue. As highlighted in our strategy report, EBITDA margins for the Singapore telecommunications sector fell by 7.8% in 1Q08. The decline in margins for the sector is the largest on record due to aggressive marketing and equipment subsidies. We estimate equipment subsidies for SingTel (Singapore) at S$115m in 4QFY08, the highest level since 4QFY05. Cost of Sales (net of equipment sales) as a percentage of Services EBITDA was 58.1%, the highest level on record. We expect this to continue for the next two quarters given the continued high promotional activities.

Better off buying the associates? We estimate that the market has priced in a premium of S$0.63 for SingTel as a holding company at present, given the current market prices of its associates. Even if we were to use the highend of consensus estimates for SingTel and Optus of S$1.76, investors still pay a S$0.15 premium for SingTel as a holding company. Also, we estimate that investors are currently paying about 19x FY09PE for SingTel and Optus after stripping out the current market prices for SingTel’s associates, which is far higher than the industry average of 12-13x. Coincidentally, by imputing a PE of 13x for SingTel and Optus, we get a value of S$2.96 which is very close to our recommended entry level of S$3.00. Given the current disparity in value, investors can look to short SingTel and go long on the associates in
the short term.

Maintain HOLD recommendation, target price lowered to S$3.50 (previous S$3.76). We maintain our HOLD recommendation on SingTel and have lowered our target price from S$3.76 to S$3.50. We have adjusted our DCF valuation for SingTel and Optus from S$1.53 to S$1.28 as we have adjusted downwards our earnings for FY09, FY10 and FY11 by 4.4%, 1.8% and 1.4% respectively and adjusted our WACC from 8.5% to 8.9%. Together with our estimated dividend of S$0.125 for FY09, our recommended entry level for SingTel is below S$3.00.

Strong fundamentals

Recent price weakness. The share price of SingTel has dropped recently to S$3.51. This is in line with the fall in the equity markets due to increasing concerns over inflation and the sub-prime mortgage problems.

Portable mobile phone numbers. On 13 June 2008, mobile phone numbers become portable. This has led to the three telecommunications companies, SingTel, StarHub and M1, offering discounts and bundled services to existing and new customers. As a result, their marketing and retention costs will increase.

Discounts and bundled services. Both SingTel and StarHub have the advantage of offering discounts from the bundling of services including pay-TV, broadband and multiple mobile lines whereas M1 can only bundle services from multiple mobile lines as it does not have pay-TV and broadband services. However, M1 provides flexibility by allowing up to five family members to share unused talk time. For StarHub, it allows three family members while SingTel only allows parent and child to share unused talk time. Furthermore, SingTel and StarHub offer live Champions League and English Premier League matches on the mobile phones respectively
while M1 only provides MediaCorp shows on the mobile phones.

SingTel remains as the market leader. We believe that SingTel will be able to retain its market share and remain as the market leader in the Singapore market. We also expect strong profit contributions from Optus and the regional mobile associates. Fundamentally, this is a company that reports strong earnings and pay good dividends.

Ex-Dividend on 6 August 2008. Investors who hold the stock on 6 August will also receive final one-tier tax exempt dividend of S$0.069.

Maintain BUY recommendation, target price at S$4.01. We maintain the target price at S$4.01 and expect SingTel to report good earnings for 1Q FY2009. The recent price weakness presents a good opportunity to buy the stock. Based on its last done share price of S$3.51, there is potential upside of 14.2 percent.

SingTel raises stake in Globe to 47.34%

SINGAPORE Telecom is raising its stake in associate Globe Telecom to 47.34 per cent from 44.47 per cent.

In a statement yesterday, SingTel said that it will pay Ayala Corporation 4,598 million pesos ($140 million), or 1,210 pesos per share, for 3.8 million shares in Globe, the second largest telco in the Philippines.

According to Bloomberg, Ayala owned 33.3 per cent of Globe before the deal.

SingTel said that the price was arrived at on a willing-seller willing-buyer basis, taking into account projected future cash flows, comparables and the prevailing market price.

On Thursday, the closing price of Globe on the Philippine Stock Exchange was 1,185 pesos.

SingTel bought its initial 44.47 per cent stake in Globe in 1993 for $882 million.

‘This transaction is in keeping with our strategy to increase our holdings in our regional associates when the conditions are right,’ said SingTel spokesman Chia Boon Chong.

SingTel has said that its acquisition strategy is to raise stakes in associates or invest in new markets, focusing on Asia.

In September last year, SingTel spent $1.17 billion on a 30 per cent stake in Warid Telecom, Pakistan’s fourth-largest mobile operator, with 14 million customers.

For SingTel’s financial year ended March 31, 2008, Globe’s pre-tax profit contribution to the group was up 9.4 per cent to $317 million, benefiting from 8 per cent appreciation of the peso.

For the first quarter of 2008, Globe reported core net income of 3.5 billion pesos, down 4 per cent as customers cut spending while struggling to cope with rising food and fuel prices.

Globe president Gerardo Ablaza said in April that sales were weakening and it would be difficult to match last year’s double-digit growth rate.

The Philippines’ economic growth is expected to ease from last year’s 31-year high of 7.3 per cent as a possible recession in the US, its main trading partner, hits exports and as rising inflation crimps consumer spending.

The World Bank expects growth in the Philippines to slow to 5.9 per cent this year.

But the economic slowdown has not dampened new cellphone subscriptions. Globe’s mobile subscribers rose 26 per cent to 21.3 million from a year ago.

Globe has 38 per cent of the Philippine mobile industry, against rival PLDT’s 55 per cent.

SingTel in talks with Chinese telcos

Restructure of Chinese telecom market opens doors to foreign investors

SINGTEL, South-east Asia’s largest telco, is in talks with operators in China about investing in the world’s biggest telecoms market, which is being overhauled and opened to foreign investors.

‘It’s a market we have been monitoring. We have been in discussions with various operators in the China market,’ SingTel’s chief executive officer, Chua Sock Koong, told reporters on the sidelines of an industry conference.

Last month, Beijing unveiled a long-awaited sector revamp, aimed at improving competition and rolling out high-speed third-generation mobile services, in what has been called the world’s largest industrial reorganisation.

The restructure also opens the door to foreign investors who have been restricted to taking small stakes, such as Vodafone’s 3.3 per cent investment in China Mobile Ltd.

‘We are not financial investors, we want to make investments as strategic partners, and the stake is one that would give us the necessary governance rights and involvement at the board and management level,’ Ms Chua said.

‘There are ongoing engagements but no deal has been done,’ she added, without naming any firms.

Earlier this month, media reports citing unnamed sources said SingTel was considering investing in fixed-line operator China Telecom Corp, although there have been no formal talks.

This follows China Telecom’s comments that it was in talks to sell a stake to a strategic investor and had been approached by four or five companies.

China Unicom early this month paid US$24 billion for a fixed-line rival and sold a network for almost US$16 billion as part of the industry reshuffle.

SingTel, which derives about two thirds of its pre-tax earnings from operations outside Singapore, is seeking acquisitions in growth markets to expand its earnings by double-digits over the medium term.

SingTel was actively involved last month in potential takeover talks between India’s top mobile operator Bharti Airtel Ltd, in which it owns an around 30 per cent stake, and South Africa’s MTN Group Ltd, according to a source familiar with the situation.

But Bharti’s talks with MTN collapsed over how the two would structure a combined entity.

SingTel, Singapore’s largest listed company, holds stakes in various mobile operators in markets ranging from Pakistan to Indonesia. It also owns Australia’s second-largest telecoms firm Optus. — Reuters