Will SingTel pull off another coup?

FOR its legion of shareholders, Singapore Telecommunications continues to keep faith – going by its latest quarterly results. The buoyant economy here and in the region has helped the telco deliver three straight quarters of double-digit sales growth as the momentum enjoyed by the juggernaut shows no sign of slowing down.

Bantering with some members of the media last week after posting the company’s third-quarter ended Dec 31, 2007, results, chief executive Chua Sock Koong said that with so many ’11 per cent’, it was hard to keep tab.

She was referring to the fact that group revenues grew strongly by 11 per cent to $3.83 billion, driven by an 11 per cent growth in the Singapore business to $1.25 billion and an 11.5 per cent rise to $2.58 billion in sales at Australian unit Optus.

Less than kind observers will say that well-managed large companies, particularly when they have the incumbent advantage, tend to do well when all is abuzz. Singapore grew a sterling 7.5 per cent in 2007 and created a record 237,000 jobs which drew in foreign workers likes bees to honey. SingTel, in particular, bagged the lucrative foreign worker mobile phone business.

At end-2007, SingTel Singapore’s 2.33 million mobile phone customers gave it a 41.46 market share.

The 600-pound gorilla should have little trouble meeting the supposedly momentous introduction of true number portability which will come in June. It is likely to be little more than an irritant for the telco which racks up billion-plus-dollar sales in a mere three months. Smaller rivals StarHub and MobileOne are likely to steer clear of overly aggressive tactics.

What, then, will exercise SingTel’s top managers in the months ahead?

Since Ms Chua took over the helm in April last year she has constantly given the same answer when asked where SingTel’s next acquisition is. Basically she said that SingTel’s focus remains in the region where it has significant know-how and it is also learning about new markets in Central Asia, the Middle East and Africa.

The best (relatively riskless) bet for SingTel would be to increase its stakes in several of the group’s associates which have contributed strongly to the bottom line and its burgeoning cash pile.

Associates made up 53 per cent of SingTel’s underlying net profit in the quarter under review. Cash dividends from them for the nine months to end-2007 was $1.02 billion, up 74 per cent from a year ago.

‘We have a strong balance sheet with significant flexibility for further investment,’ Ms Chua said last week.

At end-2007, total free cash flow was $2.65 billion, up 41 per cent.

The global financial market turmoil should lead to better priced opportunities. But telcos are unlikely to come cheap as it is one industry which is pretty recession-proof, said M1 chief executive Neil Montefiore last month.

SingTel’s three best performing associates – Indonesia’s Telkomsel, India’s Bharti and Thailand’s AIS, all No 1 operators in their respective countries – were acquired in the aftermath of the Asian financial crisis. As was Australian unit Optus.

Now if only SingTel could pull off a similar coup this time round as the world stands on the cusp of a slowdown. Still, its million shareholders who have grown used to the group’s stream of healthy payouts should sleep easy, bear markets notwithstanding.

Affirms FY08 guidance, upgrade to BUY

Cost pressures remain in 3Q08. Singapore Telecommunications Ltd (SingTel) reported a decent set of 3Q08 results. Revenue rose 11.4% YoY (+3.9% QoQ) to S$3,825.0m, driven by revenue growth of 11% in the Singapore business and the A$ appreciation of nearly 8%, although PATMI slipped 4.2% YoY and 3.7% QoQ to S$952.3m. However, underlying profit jumped 21.7% YoY and also inched up 2.2% QoQ to S$931.4m, once we exclude the exceptional items, albeit off the 5.2% QoQ pace seen in 2Q08. Operational EBITDA rose 7.5% YoY and 1.1% QoQ to S$1,135.5m, but margins have come off further to 29.7% in 3Q08, versus 30.4% in 2Q08 and 30.8% in 3Q07, no doubt reflecting continued cost pressures in Singapore and Australia as we had expected.

Associates did better in 3Q08. In addition, we also saw good growth from its regional associates, where their collective pre-tax contribution grew 31.2% YoY and also 4.8% QoQ. This time around, the star performer was Globe Telecom in Philippines, which saw pre-tax profit surged 55.5% YoY and 14.1% QoQ to S$81.0m, boosted by both a 7% appreciation in the PHP against SGD and also robust subscriber growth. For the quarter, SingTel also saw a sharp 53% YoY (+11% QoQ) jump in its mobile subscribers to hit 171.5m, with the bulk coming from its latest investment in Pakistan’s Warid Telecom. Management expects to continue to aggressively grow its network and customers there, as it is a market with low penetration rate.

Affirms its FY08 guidance. Going forward, management also affirmed its previous FY08 guidance and continues to expect revenue from Singapore to grow at single-digit rate and Australia to grow along with the market, with pre-tax earnings growth from its regional mobile business at doubledigit level. And as the 9M08 revenue of S$9,992.8m (+10.9%) already met 83.2% of our FY08 estimate and the underlying profit of S$2,712.9m (+16.3%) met 80.4% of our forecast, we are bumping up our estimates by around 4.4%. However, we have left our FY09 estimates largely unchanged, as margin compression and high acquisition/retention costs may negate subscriber growth.

Upgrade to BUY. In line with its better operational performance, we have also revised up our fair value from S$3.91 to S$4.35. As there is now nearly 11.6% upside from here, we upgrade our call to BUY.

Expect further outperformance

3QFY08 results were within expectations. Reported 3QFY08 earnings of S$952m (- 4.2% yoy) were in line (Outlook remains positive. The strong operating performance continues to support our thesis that SingTel offers reliable earnings growth through a rejuvenated Singapore operation and associates led by Bharti and Telkomsel. However, we note that rising competition in Indonesia could make Telkomsel’s earnings more vulnerable to disappointments. That said, we still expect Telkomsel to remain the dominant operator in Indonesia.

Trimming earnings estimates. We trim our earnings estimates by 0.2-2% for FY08-10 primarily due to updated currency assumptions and an earnings downgrade for Telkomsel, reflecting concerns on rising competition. This is partially offset by an earnings upgrade for Singapore operations.

Maintain Outperform with reduced target price of S$4.45 (S$4.55 previously). Our sum-of-the-parts valuation has been reduced by our updated forex assumptions and Telkomsel earnings downgrade. However the impact is partially offset by our earnings upgrade for Singapore operations and Globe. We expect SingTel to outperform the STI in an environment of heightened risk aversion. SingTel offers defensive earnings growth through a portfolio of “best-in-class” telco operators in the region. We also expect SingTel to surprise consensus with a special dividend in 4QFY08. Potential newsflow on M&As of Vietnam telco assets towards 2H08 should also be supportive of its shares.

SingTel gets record 197,000 new mobile subscribers in Q3

Group combined mobile subscriber base in the region hits 171.5m

GIANT telco Singapore Telecommunications (SingTel) continues to hoover up mobile phone subscriptions as consumers indulge in their love affair with the handset.

For the quarter ended Dec 31, 2007, SingTel has scooped a record 197,000 new subscribers to bring its total to 2.33 million, meaning one in two people in Singapore is its customer.

The record quarterly increase of 197,000 prepaid and postpaid mobile subscribers beat the preceding quarter’s high of 185,000 net additions, said SingTel in a statement yesterday.

Singapore’s population stands at 4.68 million, comprising one million foreign workers and their families and 3.68 million Singaporeans and permanent residents. But the popularity of the mobile phone here has led to more handsets than people. According to the latest data from the Infocomm Development Authority of Singapore, total mobile subscriptions as at end-November 2007 stood at 5.432 million or a penetration rate of 116.1 per cent.

SingTel’s market share as at end-November was 41.2 per cent, up from 40.3 per cent as at end-September, said a company spokeswoman. The company reports third-quarter and nine-month results ended Dec 31, 2007 today.

Smaller rivals StarHub and MobileOne (M1) have been struggling to keep their market share amid tough competition.

M1, which posted full-year 2007 results last month, said its customer base rose 14.8 per cent to 1.54 million but market share fell to 27.4 per cent at the end of November from 28.5 per cent a year ago.

StarHub will post fourth-quarter 2007 results on Feb 13, 2007. Elsewhere in the region, SingTel’s associates too have been hitting records in garnering more mobile phone subscribers. Group combined mobile subscriber base in the region has reached 171.54 million as at Dec 31, 2007, up 53 per cent from Dec 31, 2006’s 112.28 million.

The latest figure was boosted by the addition of Warid Telecom’s 13.21 million subscribers in Pakistan in the quarter. SingTel bought 30 per cent of Warid in September 2007. SingTel has associates in Australia, Bangladesh, India, Indonesia, Pakistan, the Philippines and Thailand.

Recording the fastest growth pace was Indonesian associate Telkomsel. Its 3.43 million net addition was more than double the previous quarter’s 1.65 million, bringing the total customer base to 47.89 million as at end-2007. SingTel has a 35 per cent stake in Telkomsel which is currently facing charges of price fixing and may be forced to reduce its tariffs. SingTel and parent Temasek Holdings are also fighting anti-competitive charges in the Indonesian courts.

Doing well too was Bharti which propelled past the 50 million mark. Bharti, India’s largest regional mobile, broke its previous net addition records by attracting 6.29 million mobile subscribers in the quarter. As at Dec 31, 2007, Bharti – in which SingTel owns 30.45 per cent – has enlarged its subscriber base to 55.16 million mobile subscribers.

AIS, Globe Telecom, PBTL and Warid Telecom also posted healthy subscriber growth of between 4.4 per cent and 11.3 per cent during the quarter.

Optus, SingTel’s Australian unit, saw its subscriber base pass the seven million mark at end-2007, up from 6.68 million a year ago.

Impressive Quarter Once Again

Overall results exceed expectations. Underlying net profit of S$931m (up 22% yoy, 2% qoq) exceeded our forecast of S$912m and consensus forecast of S$907m. Besides there was exceptional income of S$21m in 3Q08. We have excluded S$84m in compensation from IDA from last year results for fair comparison.

Singapore business inline with impressive market share gains. Singapore EBITDA contribution of S$479m was in line with our expectations of S$480m. EBITDA margin of 38.7, though slightly below our expectations of 39% margin, was compensated by higher revenue growth of 11%. Continuous market share gains in mobile business were quite impressive as SingTel garnered almost 60% of the total new subscribers added in the quarter.

Australia business inline with better performance across fixed line. Optus EBITDA contribution at A$506m was (up 1% yoy, 6% qoq) in line with our expectations of S$505m. However, EBITDA was up 9% in S$ terms as A$ is up 8% yoy. Due to aggressive subscriber acquisition plans, mobile business margins were hit, which were compensated by higher margins in fixed line business from higher on-net volumes.

Regional associates above expectations mainly due to Globe Telecom. Regional associates contributed S$656m (up 30% yoy, 4% qoq) in pre-tax earnings, which is slightly higher than our expectation of S$645m. Bharti’s, Telkomsel and Globe’s contribution grew 39%, 23% and 55% yoy respectively. Globe Telecom surprised on the upside due to higher subscriber growth and data services in the festival season along with forex gains.

Healthy Outlook. Market share gains in Singapore should reflect in better margins next year. Bharti should continue to register impressive growth while Telkomsel could witness some slowdown due to lower tariffs. Maintain BUY at SOTP based target price of S$4.50