Better-than-expected Results

2Q Results. SingTel reported 2Q operating revenue of S$3,695m (+10.9% yoy) and net profit of S$988m (+3.3% yoy). Moreover, EBITDA increased to S$1,742m (+2.3% yoy). The better-than-expected results were mainly attributed to the strong performances by SingTel and the regional associates.

In view of the excellent performance, SingTel announced an interim ordinary dividend of S$891m or 5.60 cents per share (+51.8% yoy).

Strong Performances. In Singapore, SingTel continued to post double-digit revenue growth 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 3.7 percent to A$1.93 billion despite a highly competitive market.

The regional mobile associates also posted better-than-expected results for the quarter. Pre-tax earnings gained 21 percent to S$600m while post-tax earnings increased 21 percent to S$477m. These results were due to the better performances from Bharti Telecom Group.

FY 2008 Outlook. Management remains optimistic about its business in 2007. In Singapore, operating revenue is expected to grow at single-digit level and capital expenditure to revenue ratio is expected to be in low double-digits. The revenue growth for Optus is likely to be to 2.5 to 3 percent and capital expenditure is approximately A$1.1 billion.

Meanwhile, the pre-tax profit contribution from the regional mobile associates is expected to grow at double digits levels and cash dividends from associates are likely to increase.

Maintain BUY recommendation, target price raised from S$3.90 to S$4.22. SingTel is definitely a BUY for investors. This is because it pays good dividends. Moreover, its business continues to grow in Singapore and Australia with strong contributions from its regional mobile associates. The stock has performed well after the market correction in August 2007.

Foreign currency gains help lift SingTel Q2 profit 3.3%

Regional associates continue to deliver double-digit earnings growth

SINGAPORE Telecommunications (SingTel) yesterday reported a 3.3 per cent rise in second-quarter net profit to $988 million, helped by foreign currency gains.

SingTel also declared an interim dividend of 5.6 cents, up 52 per cent from 3.69 cents a year earlier. The total dividend payout of $891 million represents 50 per cent of the group’s underlying net profit.

Underlying earnings per share for Q2 ended Sept 30 rose 17 per cent to 5.74 cents.

SingTel’s regional associates – especially Bharti and Telkomsel, the largest telcos in India and Indonesia – continued to deliver double-digit earnings growth, up 24 per cent to a pre-tax profit of $633 million.

For the first half, SingTel’s net profit was $1.9 billion, up 6.6 per cent on a 10.7 per cent gain in operating revenue to $7.3 billion.

The telco, which gets 74 per cent of its earnings from outside Singapore, benefited from the stronger Australian dollar and Indian rupee.

SingTel chief financial officer Francis Heng said the Australian dollar and Indian rupee strengthened 8 and 9 per cent respectively against the Sing dollar from a year earlier.

But there was some negative impact from the 6 per cent depreciation of the Indonesian rupiah, he said.

SingTel chief executive Chua Sock Koong said: ‘The group has a policy of hedging all its foreign currency commitments and does not take part in any trading activity . . . that should allay any concern the public may have on that front.’

For Q2, the stronger Australian dollar lifted operating revenue and net profit by $176 million and $11 million respectively.

At home, SingTel’s focus on gaining market share, especially in the mobile segment, helped it achieve double-digit revenue growth, but at the expense of margins.

Revenue rose 10 per cent to $1.2 billion but operating expenses increased a faster 17 per cent to $717 million.

Operational Ebitda (earnings before interest, tax, depreciation and amortisation) margin fell 4.1 percentage points to 42.2 per cent.

The lower margin reflected a change in revenue mix as the lower-margin IT business grew faster than the telecom business, SingTel said.

In addition, it incurred higher acquisition costs and spent more on various initiatives, though these are expected to contribute to revenue and earnings in subsequent years, it said.

SingTel launched mio TV in Q2 and has now signed up 10,000 customers.

Revenue from mobile phones rose 13 per cent to $322 million as the telco added a record 185,000 customers and grew market share 1.3 percentage points to 40.3 per cent.

Australian unit Optus recorded 3.7 per cent revenue growth to A$1.9 billion. Growth in Sing-dollar terms was 12 per cent to S$2.5 billion, as the Aussie dollar strengthened 8 per cent from a year earlier.

But SingTel’s efforts to maintain its position in the competitive market saw its margins fall, with operational Ebitda margin down 1.3 percentage points to 24.7 per cent. Net profit was 5.6 per cent lower at A$123 million.

Overall, SingTel’s pre-tax profit from associates was up 24 per cent to $633 million, driven mainly by Bharti which contributed $197 million.

On SingTel’s overseas acquisition strategy, Ms Chua declined to comment on a reported bid last month for a majority stake in state-owned Ghana Telecom, the West African country’s dominant operator.

‘Clearly we continue to look for investment opportunities, the focus remains in Asia where we think it’s a region we understand best,’ she said.

‘At the same time we are in the process where we are trying to learn new markets whether its in Central Asia or some of the Middle Eastern markets, and we’ve been shown various opportunities in Africa as well, but those markets are still in the stage where we’re learning them.’

Singapore business shines again

Strong follow-through from 1QFY08

• In-line. Reported 2QFY08 earnings of S$988m (+3.4%yoy) was 4% ahead of our estimates but beat consensus by 10%. Excluding exceptional gain of S$75m (mostly sale of Network i2i to Bharti), core earnings of S$914m (12.1%yoy). This was a strong follow-through from 1QFY08’s results. Key positives were: 1) 10.9%yoy top-line growth; 2) 17%yoy associates growth; 3) Interim DPS of 5.6 cts (+24%yoy). Key disappointment was qoq EBITDA margin decline of 120bps.

• Top-line sparkles. 2QFY08 revenue growth (10.9%yoy) was powered by continued robust Singapore operations (+9.6%yoy) as well as a stronger A$ which helped lift Optus S$ revenue (+12%yoy). Singapore revenues was driven by mobile (+13%yoy) on solid prepaid (+79%yoy) and subscriber growth (6.8%yoy). ARPU also increased for prepaid (S$15, +15%yoy) on MOU growth and postpaid (S$90, +3%yoy) on MOU as well data usage growth. In A$ terms, Optus top-line grew 3.7%yoy which was slightly above our expectation on new product launches
and increased customer acquisition activities.

• EBITDA margin decline was higher than expected primarily due to faster growth of low-margin IT business (a product mix issue) in Singapore and more aggressive marketing at Optus. EBITDA margin for Singapore telco operations were within our expectation.

• Associates PBT contribution grew 17%yoy. Growth was powered by Bharti (+79.3%yoy) and to a lesser extent, Telkomsel (+9.6%yoy) which was dragged down by a weaker rupiah. In rupiah terms, Telkomsel posted 16%yoy gain in PBT contribution. Globe’s core PBT grew 23%yoy. AIS was the only disappointment which grew 3.7%yoy which essentially boosted by a stronger baht.

• Maintain Outperform and target price of S$4.54. We continue to like SingTel for liquid exposure to high-growth associates, namely Bharti and Telkomsel. We also like the rejuvenated Singapore operations and reiterate our expectation for SingTel to surprise consensus on the dividend front. SingTel remains our top pick for Singapore telcos over the next 6 months.

Bharti’s growth momentum continues

Bharti 2QFY08 Results

In line with consensus but above our expectations. Bharti’s (Sing Tel’s 30.5% associate) recorded 1H08 net profit of Rs. 31.2bn (+85%yoy) that was 3% below consensus estimates but 7% above our expectation.

Revenue surged 45%yoy on robust subscriber growth. The India growth story continues with Bharti’s subscriber base growing by 81% yoy and 15% qoq. Bharti cemented its market leadership role by increasing its market share by 180bps yoy to 23.9% as at end Sept 07. Bharti ended 2QFY08 with 48.9m mobile subscribers.

ARPU declined but EBITDA margin expanded. MOUs declined 2% qoq, contributing to lower ARPUs (-6% qoq). This can be linked to the rationalisation of its free minutes/low tariff plans as well as some seasonality factors. These initiatives, combined with economies of scale helped lift EBITDA margins to 42.8% (+140bps qoq, +370bps yoy). Management expects MOU recovery going into Q3 and Q4. However, ARPU should continue to decline as Bharti expands into rural areas but management is focused on making every subscriber profitable.

Spectrum not expected to be growth bottleneck. Management clarified that spectrum constraints are limited to CBD areas but is not an issue for rural/hinterland areas where Bharti is pursuing new subscribers.

Tower demerger initiative is awaiting High Court approval in early November.

Regulatory update. The DoT has accepted TRAI’s recommendations for allowing unlimited service providers in one circle, permitting dual technologies in one circle and adopting and enhancing the subscriber-linked criterion for allocation of additional spectrum. These developments are would increase competitive pressure for GSM players like Bharti. GSM players including Bharti have appealed against these decisions with a Nov 12 date set for the hearing.

Comments

Bharti continues to execute well on all fronts: delivering top-line growth, growing its margins and extending its market leadership despite increased competition. Bharti is comfortably on track to meet consensus FY08 earnings estimate of Rs 64.6bn with scope to surprise on the upside.

Outlook remains bright for Bharti. With penetration rates still below 20%, Bharti clearly has attractive growth opportunities ahead as the undisputed market leader. We believe that concerns regarding increased competition from the potential regulatory change that allows unlimited serviced providers in one circle as well as a more aggressive Vodafone is premature. There are still ample growth opportunities for the major players and Bharti’s excellent track record as the market leader remains intact.

Bharti’s compelling growth prospects is a key reason for our bullish view on SingTel. Bharti is the largest value driver contributing 32% to our SingTel valuation. This should increase as Bharti’s growth outpaces SingTel’s other business units. From the earnings contribution standpoint, Bharti currently contributes 32% of associate income or 17% of SingTel’s earnings.

Valuation and recommendation

Maintain OUTPERFORM with unchanged target price of S$4.54. SingTel remains our top-pick among Singapore telcos over the next 6 months, offering reliable earnings growth as well as highly liquid exposure to fast-growing associates such as Bharti and Telkomsel.