Getting due credit

• Safe-haven exposure to high-growth markets. SingTel’s diversified earnings base, liquidity and exposure to the world’s fastest-growing mobile markets offer a unique investment proposition in an uncertain market environment.

• Cheaper, more liquid exposure to Telkomsel. Based on the current prices of Singtel’s other associates and our fair valuation of Singtel’s Singapore operations, Telkomsel is trading at an implied 12.5x CY08 P/E. This is at a 20% discount to the current 15.5x CY08 P/E for Telkomsel, based on PT Telkom’s current share price.

• Bharti has scope for upside surprises on robust subscriber adds. Bharti continued to gain the largest share of new subscribers and outpace industry growth in August. Bharti is firmly on track to meet consensus estimates at August’s netadds rate of 2.05m/month. Bharti’s net adds per month increases at an average 54k/month in the past year, setting the stage for upside surprises.

• Maintain Outperform with higher target price of S$4.27 (S$4.05 previously). Our sum-of-parts-valuation has been raised primarily on a higher target price for Bharti (based on consensus target price) and changes in currency assumptions. Our earnings have been raised by 1% for FY08-10 to reflect earnings upgrades for Bharti, based on consensus estimates. Key catalysts could continue to be increased market preference for reliable earnings growth tied to structural domestic consumption and liquid exposure to high-growth mobile markets. SingTel remains our top Singapore telco pick.

Signs of weakness?

– SingTel staged a rally over the last 4 weeks that is showing signs of weakness at this juncture.

– First sign of weakness was observed as the price rallied on the back of declining volume.

– Second sign of weakness was observed by the price break above the 2nd of Feb 07 high of S$3.70 on 14th Sept which was accompanied by only a marginally higher volume. This indicates the breakout might not be sustained and could very likely pull back in the weeks ahead.

– Yesterday’s strong price move up seemed to indicate that the uptrend could head up a little more before we witness a reversal, given that RSI, stochastic and MACD have all broken above their downtrend lines.

– However, we are not ignoring the weak volume on the rebound and price breakout. We advocate caution and lightening up on positions as the rebound continues. Resistance set at S$4.00.

– We anticipate a reversal in trend in the weeks ahead. 1st support is set at S$3.60 and subsequent support is set at S$3.32.

SingTel sees smaller growth in revenue

(SINGAPORE) Singapore Telecommunications, South-east Asia’s largest telco, said yesterday that it expects revenue in the fiscal year ending March 2008 will grow at a single-digit rate and that free cashflow will decline slightly.

In a presentation posted on the stock exchange, chief executive Chua Sock Koong said that revenue at SingTel’s Australian unit Optus would grow between 2.5 and 3 per cent while earnings contribution from regional mobile firms would grow at double-digit rates.

The company also has set a target of double-digit growth for underlying earnings in the medium-term, according to the presentation, which will be delivered at a CLSA conference in Hong Kong today.

Last month the company said it expected revenues to grow by more than 5 per cent in 2008, driven by rising mobile phone and broadband subscriptions. — Reuters

The tough gets going

• Reliable associate earnings + risk aversion = outperformance. Reliable earnings growth from SingTel’s blue-chip regional associates should find favour with investors as risk aversion heightens. Earnings growth for SingTel’s associates is based on solid domestic market fundamentals and should be relatively insulated from a US economic slowdown.

• Singapore growth re-rated. Singapore operations surprised with 10% yoy topline growth in 1QFY08 after years of sluggishness. Singapore is poised to deliver multiyear EBITDA growth of 4-5% p.a. with new service offerings.

• 4.6% yield limits downside risks. Our above-consensus yield expectation is backed by free-cash-flow yields of 4.6% and premised on a 70% payout ratio.

• Raising earnings estimates by 1-2% for FY08-10. Robust topline growth for Singapore operations in 1FY08 has convinced us that rising costs from the launch of new initiatives should weigh less on margins than earlier expected.

• Upgrading to Outperform from Neutral; raising target price to S$4.05. Our sum-of-the-parts valuation is raised from S$4.02 on the back of our earnings upgrade. SingTel is poised to outperform the STI, with heightened risk aversion being the key catalyst. It is now our top Singapore telco pick, offering reliable earnings growth and limited downside from a 4.6% yield. This highly-liquid stock is an attractive proxy for regional telcos in a risk-averse environment, in our view.

SingTel sale of Network i2i stake to yield Q2 gain of $72m

SINGAPORE Telecommunications yesterday said its second- quarter results will be boosted by a $72 million gain arising from the sale of an undersea cable stake to associate Bharti Airtel, India’s largest private phone company.

SingTel said the sale of its 49.99 per cent interest in Network i2i Ltd to Bharti will result in a gain of about $104 million, of which $72 million will be recognised in the second quarter ending Sept 30.

The balance of $32 million will be recognised on a straight-line basis over the remaining useful life of the cable system of about 10 years, SingTel said in a statement.

In January, SingTel said it would be selling its entire interest in Network i2i as the telco optimises its network infrastructure assets. Network i2i owns the undersea cable network between India and Singapore.

With the sale, SingTel, which owns a 30.5 per cent stake in Bharti, will still have indirect ownership of the undersea cable network.

Disposal proceeds amounted to US$66.7 million, comprising cash of US$55 million and assumption by Bharti of a US$11.7 million debt, due from SingTel to Network i2i, it said.

The consideration was arrived at on a willing-seller, willing-buyer basis based on a combination of replacement value and comparable benchmarks for a similar cable system.

As at July 31, the unaudited net asset value of the shares in Network i2i was (US$0.27) per share, said SingTel.

As part of the same transaction, SingTel’s wholly owned subsidiary SingTel i2i Pte Ltd has also entered into an agreement with Bharti to sell its entire 49 per cent interest in Bharti Aquanet Ltd for 159,150,931 rupees (S$5.95 million). The consideration was arrived at on a willing-seller, willing-buyer basis.

The valuation of the shares in Bharti Aquanet was based on an agreed internal rate of return calculated on the initial investment amount. As at July 31, the unaudited net asset value of the shares in Bharti Aquanet was 101.81 rupees per share. The gain on disposal of approximately $1.2 million will be recognised in the quarter ending Sept 30.

The giant telco owns a submarine cable network through its US$40 million investment in Sea-Me-We 4, or the South-east Asia-Middle East-Western Europe 4 fibre-optic cable network.

Sea-Me-We 4, which links 14 countries in Asia, Europe and the Middle East, was built to meet strong demand for Internet and data services from markets in Asia and the Middle East, as well as to enhance communication links between these markets and Europe and the US.

The US$500 million Sea-Me-We 4 cable network, the fourth in a series of cables connecting Asia, Europe and North Africa and completed last year, was built by a consortium of 16 telcos.

Spanning some 20,000 kilometres, it is capable of carrying telephone, Internet and various broadband data streams, besides offering ultra-fast connectivity for the rapidly growing international telecommunications traffic, according to SingTel’s 2005/06 annual report.