SingTel plans $220m network upgrade

Existing HSPA infrastructure will be upgraded to deliver download speeds of 14.4 Mbps

SINGAPORE Telecommunications (SingTel) is investing $220 million in an islandwide cellular network upgrade to set the stage for delivering higher-speed mobile broadband services.

According to a company statement yesterday, the facelift – which is due for completion in March 2009 – will provide the company with a ‘future-proof’ network capable of handling more bandwidth over-the-air at much higher speeds.

‘More and more customers are accessing data and the Internet on the move and they need higher data speeds,’ said Mark Chong, SingTel’s executive vice-president of networks.

To seize on this trend, the company had already launched a 3.5G or HSPA (high speed downlink packet access) network in May 2007 to allow customers to surf the Net on their phones or laptops at broadband speeds of 3.6 megabits per second (Mbps). StarHub and M1 have also introduced similar networks. With the new project, which has been awarded to Swedish network equipment giant Ericsson, SingTel’s existing HSPA infrastructure will be upgraded to deliver download speeds of 14.4 Mbps. This will result in faster loading times for Web pages and could also pave the way for SingTel to deliver its upcoming mobile TV service.

In addition, upload speeds will also be bumped up from 384 kilobits per second (Kbps) to 5.76 Mbps, making easier for users to add large files to their blogs or their e-mail attachments through their mobile connections.

To deliver the speed boost, SingTel will be adding more base stations across the island. Once completed, the company’s network coverage will be powered by over 2,800 base stations.

This network overhaul will also help prepare SingTel for the deployment of future upgrades to HSPA technology, the group added.

‘The network enhancement programme will elevate our mobile service and coverage to an even higher level,’ said Quek Peck Leng, SingTel’s executive vice-president of its consumer division.

SingTel currently has the lion’s share of the local mobile market with a customer base of 2.5 million, followed by StarHub and M1.

Closer look at 4QFY08 results

• In line. FY08 net profit of S$3.96bn (+4.8% yoy) is 2.4% ahead of our estimate but beats consensus by 5%. 4Q08 core earnings of S$968m were up 9.8% yoy. DPS of 12 cts/share disappointed but signals SingTel is serious about MTN acquisition.

• Singapore: topline growth with margin compression. Mobile subscriber market share gains and ARPU growth drove FY08 topline growth of 11% yoy. EBITDA margin was down 270bp yoy on higher subscriber acquisition costs. Revenue growth should moderate to 3.7% in FY09, with stable EBITDA margin of 40% (guidance).

• Optus: topline growth revived, margins next? FY08 topline grew 3.8% yoy on subscriber growth and launch of wireless broadband. EBITDA margin showed signs of revival (+280 bp qoq). Momentum from wireless broadband and further prepaid subscriber growth could support sustainable margin expansion in FY09.

• Associates: strong performance but slower growth ahead. FY08 was a strong year, driven by Bharti, Telkomsel and favourable exchange rates. Expectations for stronger S$ and price-war woes for Telkomsel mean slower growth ahead.

• Maintaining Neutral with sum-of-parts valuation of S$4.05. Slower growth outlook with limited scope for upside earnings surprise drive our Neutral rating. FY09-11 DPS trimmed by 11-23% as we expect SingTel to prefer to keep the powder dry for acquisitions amidst credit crisis. However, SingTel remains our top pick for Singapore telcos as it offers the best earnings growth prospects while potential acquisition of MTN with/via Bharti is a near-term re-rating catalyst.

SingTel looks further afield for surer prospects

SINGAPORE Telecommunications has reported decent enough results for the 12 months ended March 31, 2008. And although the final dividend of 6.9 cents – giving a full-year dividend of 12.5 cents or a yield of 3.33 per cent yield based on Tuesday’s closing share price – could have been better, investors seemed to have shrugged off their disappointment over the absence of a special dividend. The stock closed two cents down at $3.73 yesterday.

In an uncertain economic environment, SingTel along with other telcos in the region, is benefiting as risk-averse investors seek dividend plays with stable earnings prospects. Telcos are increasingly regarded as utilities which people cannot do without.

There was also positive news earlier this week when SingTel announced that it clinched the prize of selling the iconic iPhone in four countries: Singapore, Australia, India and the Philippines. That deal should result in millions of iPhones sold, given that SingTel’s combined customer base in these four countries numbers 93 million.

Yet the group’s prospects are overcast with a shadow from Indonesian associate Telkomsel, Indonesia’s largest mobile phone operator. Last Friday, the Central Jakarta District Court ordered Temasek Holdings and its affiliates to sell one of its two Indonesian telecom units, upholding an earlier ruling by the country’s antitrust body, with some changes. The court cut an earlier fine of 25 billion rupiah to 15 billion rupiah (S$2.23 million) and gave Temasek the option of cutting stakes in both Telkomsel and second-ranked Indosat by half. It also shortened the deadline for divestment to 12 months, from the two-year deadline set by KPPU, the antitrust body.

Although SingTel and Temasek will continue to fight the court ruling by appealing to the country’s Supreme Court, the outcome looks very uncertain.

Some observers may take Jakarta’s policy on consolidating the banking industry as writing on the wall on how it regards the first wave of foreign investors who were invited to bail out its ailing industries in the aftermath of the 1997-98 Asian financial crisis. A Temasek-led group in March sold its 56 per cent stake in PT Bank Internasional Indonesia to Malayan Banking Bhd, helping meet the country’s central bank rules limiting investors to ownership of one bank.

Telkomsel is very important to SingTel. In the quarter ended March 31, its post-tax contribution was up 3.3 per cent to $186 million, accounting for 19 per cent of the group’s underlying net profit. Telkomsel also paid an interim cash dividend in the December 2007 quarter, in which SingTel’s share came to $54 million. For FY2006, Telkomsel paid a full-year dividend of 85 per cent on net profit, and SingTel’s share of this was a massive $550 million.

Given the situation in Indonesia, SingTel’s acquisition strategy takes on a critical hue. And it strengthens talk that SingTel will take an active and direct role in helping 30.4 per cent-held Bharti Airtel, its Indian associate, land the massive takeover bid for South Africa’s MTN. Bharti has said it is in exploratory talks with MTN but has not yet made a bid, in what could become India’s biggest ever foreign corporate takeover.

Media reports have said it is eyeing a stake of 51 per cent at a value of around US$19 billion, which would create the world’s sixth-largest mobile company with 130 million subscribers in more than 20 countries. It would be a coup indeed for Bharti if it succeeds, and even more so for SingTel.

Dividend letdown stokes SingTel acquisition talk

Q4 gain at $1.1b; group wants ‘financial flexibility’

Singapore Telecommunications yesterday posted better-than-expected net profit of $1.1 billion, up 10.5 per cent for its fourth quarter ended March 31, 2008. Yet it disappointed with no special dividend, bolstering talk that it is poised to team up with associate Bharti to try and land South Africa’s MTN Group in a takeover valued at US$19 billion.

Earnings per share was 6.87 cents, up 10.3 per cent. The telco raised final dividend to 6.9 cents and together with the interim 5.6 cents, it was a full-year payout of 12.5 cents versus 11 cents a year ago. But there was no special dividend compared with 9.5 cents a year ago.

SingTel said that the 12.5 cents raised the payout ratio to 54 per cent of underlying earnings and it is revising its dividend payout ratio to a 45-60 per cent range, up from 40-50 per cent.

On the latest dividends, SingTel chief executive Chua Sock Koong said: ‘We are balancing our desire for an efficient balance sheet with financial flexibility to make further investments.’

But Ms Chua refused to be drawn into SingTel’s intentions should Bharti make a bid for MTN as she said talks were ‘at an extremely preliminary, exploratory stage’.

‘But suffice to say that our role as a strategic investor in any of our investments, and that’s not limited to Bharti, is that we take an active role in the assessment of the investment decisions that are being made at the associates,’ she added.

Before it paid $1.17 billion last year for a 30 per cent stake in Pakistan’s Warid, SingTel had not made a significant acquisition since 2001 when it bought Australia’s Optus for A$14 billion.

SingTel chief financial officer Francis Heng said the group between 2004 and 2007 returned extra cash to shareholders via capital reduction and special dividends when it did not make any significant investments.

For the full year, Southeast Asia’s largest telco said net profit was up 4.8 per cent to $3.96 billion.

For the quarter under review, Ms Chua (who has completed her first full year as SingTel chief) said group operating revenue, which was up 11 per cent to $3.76 billion, was driven by the Singapore business and a stronger Australian dollar.

Singapore business revenue rose 12 per cent to $1.29 billion – ‘the strongest revenue growth in the past five years’, as the operator outpaced rivals in adding a record 244,000 mobile phone subscribers in the quarter. SingTel Singapore now has 2.56 million users – a lion’s share of 43.4 per cent of the market.

But grabbing market share came at the expense of margins, which fell 4.2 points to 37.4 per cent in the quarter from a year ago.

The Australian dollar lifted operating revenue and net profit by $139 million and $12 million respectively.

Optus, SingTel’s Australian unit, reported a 4.5 per cent increase to A$1.94 billion (S$2.51 billion) in revenue for the quarter.

Contributions from SingTel’s regional associates grew a slower 18 per cent on a pre-tax basis in the quarter to $630 million, propelled by its 30.4 per cent-owned Indian associate Bharti Airtel. In the previous quarter, associates’ pre-tax grew 27 per cent. Dividends from associates for the full year amounted to $1 billion, up from $606 million a year ago.

The group continued to generate strong free cash flow. It was up 0.9 per cent to $929 million for the quarter and 27.9 per cent higher to $3.6 billion for the full year.

The Singapore business is the largest contributor of free cash flow to the group, at $1.4 billion for the full year. It also said earnings from regional associates are expected to grow at double-digit levels, though at a slower pace than in the past two years.

Within Expectations

FY08 Results. SingTel reported FY08 operating revenue of S$14,844m (+11.0% yoy) and net profit of S$3,960m (+4.8% yoy). Moreover, EBITDA increased to S$7,089m (+5.9% yoy). Revenue increased due to growth of the Singapore operations and appreciation of the Australian dollar. Moreover, net profit was higher as a result of the strong performances from the regional mobile associates.

However, the operational EBITDA margin dropped to 30.5 percent (-1.5% yoy) mainly due to higher mobile subscriber acquisition and retention costs in the Singapore market.

It also announced a final dividend of 6.9 cents per shares. Together with the interim dividend of 5.6 cents per share, the total dividend for FY08 is 12.5 cents per share. This is higher than the dividend of 11 cents per share in FY07.

Strong Performances. In Singapore, SingTel continued to post double-digit revenue growth of 12 percent to S$1.29 billion due to success in its growth segments such as mobile communications, data and internet as well as IT and engineering. Moreover, in Australia, Optus achieved a slight increase in operating revenue of 3.8 percent to A$7.76 billion despite a highly competitive market.

The regional mobile associates also posted better-than-expected results for the quarter. Pre-tax earnings gained 24 percent to S$2.56 billion due to the better performances from Bharti Telecom, Telkomsel and Globe.

FY09 Outlook. Management expects its operating revenue in Singapore to grow at mid single-digit level despite the commencement of Mobile Number Portability (MNP) on 13 June 2008. The revenue growth for Optus is likely to be at single-digit level, which will be driven by mobile and wireless broadband services.

Meanwhile, the pre-tax profit contribution from the regional mobile associates is expected to grow at double-digits levels, albeit at a slower pace than the past two years. This is due to more competition in the Indonesian market and higher losses from Warid as it continues to expand its network in Pakistan.

Maintain BUY recommendation, target price reduced from S$4.22 to S$4.01. We have reduced the target price to S$4.01 as we have cut our estimated profit contributions from SingTel’s regional mobile associates. We expect competition to intensify in the regional markets. Moreover, the strong Singapore dollar will result in lower profits when profits are converted from foreign currencies to Singapore dollar.

Nevertheless, SingTel remains a BUY for investors. This is because it pays good dividends. Furthermore, its business continues to grow in Singapore and Australia with strong revenue contributions from its regional mobile associates.