No more premium valuations for Bharti

Story: While Bharti should continue to be the main growth driver for SingTel, we do not advocate premium valuations for Bharti due to the onset of new competition and adverse regulatory actions in India.

Point: Our key concerns are: (1) Average number of players in each circle is set to increase to twelve in the next year from around four now, as a result of new licenses issued in Jan 08. The Indian Govt. intends to bring tariffs 50% down from its current levels, which we think can be achieved in a time span of two to three years. (2) Nationwide mobile number portability (MNP), scheduled in June 09, provides an excellent opportunity for new entrants to gain market share. (3) 3G is likely to be delayed to 2009, which could come as a disappointment to operators, short on the spectrum. (4) A likely increase in spectrum fee could place more burden on the operators who need spectrum the most.

Relevance: We have lowered Bharti’s FY10 earnings estimates by 6%, which reduces SingTel’s FY10 earnings estimates by 2.5%. Our FY09 and FY10 estimates are 3.4% and 3.3% below the consensus estimates respectively, as market appears to have overestimated associates contribution. We have lowered our DCF valuation (WACC 11%, terminal growth 3%) for Bharti to Rs.1030, which is down 14% from Rs.1200 earlier and translates to reasonably high 23 x FY09 PER and 13.3x FY09 EBITDA. We maintain HOLD for SingTel with our new SOTP based target price of S$3.75.

We see single digit earnings growth ahead for SingTel and believe that management is under pressure to invest in emerging markets to deliver on its guidance of doubledigit growth in earnings in the medium term (5-7 years).

Key takeaways from SingTel NDR

Investment Conclusion

After our non deal roadshow with SingTel management, we are maintaining our 1-OW investment opinion as well as our 12-month target price of $4.50/share based on a SOTP valuation.

Summary

What next, SingTel?

THE abrupt collapse of takeover talks between South Africa’s MTN Group and India’s Bharti Airtel over the weekend has not drawn much interest from the market.

Some are hopeful this could mean a special dividend is on the cards soon, while others think SingTel may keep its money chest full for the time being, given that other projects are brewing.

When SingTel’s associate, 30 per cent-owned Bharti, announced it was in talks with MTN early this month, there was a fair bit of buzz. After all, if successful, the deal would be the largest takeover involving an Indian company, and it could have given a boost to SingTel which has been eyeing telcos in the Middle East and Africa.

There was speculation that the takeover – which had valued MTN, South Africa’s largest telco, at a reported US$50 billion – might see SingTel get involved either as a co-buyer or increasing its stake in Bharti where it is already the biggest shareholder. Merging MTN and Bharti would create the world’s sixth-largest mobile operator, with more than 130 million subscribers in around two dozen countries.

But Bharti, India’s leading mobile operator, said on Saturday it had called off the talks after MTN proposed a new structure which would have seen the Indian group becoming a unit of the South African-based mobile phone operator.

The new structure envisaged Bharti Airtel becoming a subsidiary of MTN and the exchange of majority shares of Bharti Airtel held by the Bharti family and SingTel, in exchange for a controlling stake in MTN.

‘Bharti believes that this convoluted way of getting an indirect control of the combined entity would have compromised the minority shareholders of Bharti Airtel and also would not capture the synergies of a combined entity,’ it said.

Bharti added that it had lined up funding from bankers of over US$60 billion.

Many believed that when SingTel did not announce a special dividend – which had been expected – when it released full-year (FY) 2008 results on May 14, it was saving up cash for the takeover.

The telco had, after all, between 2004 and 2007 returned extra cash to shareholders via capital reduction and special dividends when it did not make any significant investments.

Commenting on SingTel’s latest dividend, CEO Chua Sock Koong said: ‘We are balancing our desire for an efficient balance sheet with financial flexibility to make further investments.’

DBS analyst Sachin Mittal sees two outcomes from the scrapped takeover bid.

‘We expect SingTel’s share price to benefit from this news in the near term due to two key reasons: (1) Bharti’s stock price has fallen by close to 10 per cent from its peak in the last one month on possible overpayment concerns. As Bharti constitutes 33 per cent of our sum-of-the-parts valuation for SingTel, if Bharti stages 5-10 per cent recovery, SingTel can register 2-3 per cent recovery. (2) SingTel had omitted special dividends with its FY08 results (we had expected 8 cents) possibly to reserve cash for MTN deal. With no cash outlay required for the MTN deal now, investors can hope SingTel to announce special dividends in FY09, given its net debt to earnings before interest, tax, depreciation and amortisation at 0.9x is much below the optimal ratio of 1.5x-2.0x.’

Mr Mittal also thinks that SingTel remains under pressure to invest in emerging market telcos to deliver on its guidance of double-digit growth in earnings in the medium term (5-7 years).

But UBS’ Suresh Mahadevan does not think a special dividend is on the cards for the time being. He also said ‘SingTel’s strategy doesn’t revolve around acquisition’, adding that the ‘group has a fairly good footprint in the region, especially in India and Indonesia’.

As for the prospect of a special dividend, Mr Mahadevan points to Bharti’s statement where it had received a positive response from banks on funding the proposed takeover.

He figures Bharti would have done the deal with or without SingTel’s help.

It is good for SingTel to have financial flexibility in the meantime since it has put in a bid with partners Axia Netmedia of Canada and Singapore Press Holdings for the rewiring of the nation’s high-speed broadband network, he said.

Perhaps the lack of buzz stems from shareholders’ faith in SingTel’s management, and the general flight to quality during uncertain times. SingTel, along with rivals StarHub and MobileOne, continue to be rated favourably for their high dividend yields.

Said Mr Mahadevan: ‘Singapore telcos have good management teams which are completely aligned with shareholders’ interests.’

Or it could also be the start of the mid-year school holidays with many market players away.

SingTel, STT file appeals in Jakarta

They’re fighting lower court decision that they broke anti-monopoly law

SINGAPORE Telecommunications and sister company Singapore Technologies Telemedia (STT) yesterday filed their respective appeals with Indonesia’s Supreme Court against a lower court decision that they broke the country’s anti- monopoly law.

Parent Temasek Holdings had on Wednesday filed its appeal with the Supreme Court against the ruling of the District Court of Central Jakarta which upheld the KPPU findings.

KPPU, Indonesia’s business competition watchdog, had said that Temasek and its affiliates had violated antitrust laws in their cross-ownership of the country’s two biggest telcos.

Temasek has an indirect stake in PT Telkomsel through SingTel, which owns 35 per cent of the telco.

Separately, Temasek’s wholly owned subsidiary STT holds a 40 per cent stake in Indosat, the second-largest telco, through its unit Asia Mobile Holdings.

The court had set a 12-month deadline for Temasek and its affiliates to give up one of the stakes in one of the telcos or cut their shareholdings in the two telcos by half.

A SingTel spokeswoman said yesterday that the court’s decision was wrong and without any credible basis.

‘We maintain that the decision by KPPU is wrong and is not supported by law or adequate evidence,’ she said.

SingTel and wholly owned SingTel Mobile do not own majority shares in any Indonesian company, she said.

SingTel Mobile is only a minority investor in Telkomsel and does not control its operations.

Telkomsel is majority- owned and controlled by PT Telkom, she said.

STT in a statement said that ‘contrary to the District Court’s decision, STT is not part of a ‘single economic entity’ with Temasek Holdings and SingTel, as it acts independently’.

STT, which acquired its Indosat shares from the Indonesian government following an invitation to participate in a privatisation in 2002, has never held a majority of shares in Indosat, the company said.

‘It has never assumed a dominant position to charge Indonesian consumers excessive prices, as tariffs are regulated by the Indonesian authorities and determined by the operators,’ it said.

Goh Yong Siang, Temasek Holdings managing director, strategic relations, said that Temasek has not broken any laws and will vigorously contest all allegations against it.

‘We fully respect the laws of Indonesia and hope that all our legal rights will likewise be respected,’ said Mr Goh.

‘As a long-term investor in Asia, we believe a just and impartial resolution of disputes is in the longer- term interest of Asia’s developing economies and her people. It is in this spirit that we intend to exercise all rights and remedies available to us for the orderly resolution of disputes.’