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Attractive Valuation

1Q results. SingTel reported 1Q operating revenue of S$3,567m (+10.5% yoy) and net profit of S$927m (+10.4% yoy). Moreover, EBITDA increased to S$1,769m (+9.2% yoy). All the three components of its business – SingTel, Optus and regional associates – contributed to the strong performance.

Strong growth in its business. In Singapore, SingTel benefited from the strong domestic economy. It managed to retain its market leadership position and saw its revenues for the telecoms and IT businesses grow. Moreover, in Australia, Optus achieved an increase in operating revenue of 3.5 percent to A$1.9 billion despite a highly competitive market.

The regional mobile associates also posted good results for the quarter. Pre-tax earnings gained 51 percent to S$652m while post-tax earnings increased 29 percent to S$463m. These results were due to the better performances from PT Telkomsel Selular, Bharti Telecom Group and Globe Telecom. However, Advanced Info Service and Pacific Bangladesh Telecom Limited posted poor results.

FY2008 Outlook. Management is 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 slightly from S$3.85 to S$3.90. SingTel remains attractive 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 also been resilient during the recent market correction. In fact, it is also a defensive stock.

SingTel beats forecasts with 10.4% Q1 profit rise

Telco reports $927m earnings on 10% revenue growth in S’pore operations

Singapore Telecommunications yesterday posted a 10.4 per cent gain in net profit to $927 million for its first quarter ended June 30, boosted by unprecedented double digit growth at home as the resurgent economy led to more mobile phone sales and higher business demand.
The strong performance led to an upward rerating. Revenue from the Singapore business is now expected to see high single digit growth, from the previous low single digit forecast, while capital expenditure to support the increased business is expected to rise at a low double-digit rate rather than the previously forecast single digit rate, SingTel chief executive Chua Sock Koong said at a media presentation of the group’s results.

SingTel’s net profit of $927 million easily beat the $894 million average forecast of four analysts polled by Reuters.

South-east Asia’s largest telco said that group operating revenue for the quarter rose an impressive 11 per cent to $3.57 billion compared to a year ago on the back of a 10 per cent revenue growth from its Singapore operations.

Revenues also got a lift from a stronger Australian dollar, up 7 per cent from a year ago. Optus, the SingTel unit which is the second largest telco in Australia, reported a 3.5 per cent increase in revenues to A$1.9 billion (S$2.4 billion). In Singapore dollar terms, there was an 11 per cent increase.

SingTel’s regional associates continued to deliver spectacular profit growth, with pretax profit up 51 per cent to $652 million.

Ms Chua said: ‘We have made an excellent start to the new financial year, with all our key businesses delivering strong earnings growth.

‘In particular, I am delighted that our Singapore business delivered double-digit increase in revenue, which is unprecedented in recent years. Optus also performed well by maintaining growth and profitability in a highly competitive environment, while our regional mobile associates sustained their stellar growth.’

Growth momentum in the preceding quarters and a stronger domestic economy helped propel SingTel’s domestic mobile and broadband sales. Revenues for corporate data services and IT businesses rose on more business activities.

The Ministry of Trade and Industry last week said it was confident that the economy’s strong first-half momentum – notably the robust 8.6 per cent second-quarter pace – will see it through the year. The 8.6 per cent GDP growth amounts to a blistering 14.4 per cent pace in seasonally adjusted, annualised terms. It is the fastest rate in eight quarters.

SingTel’s data and Internet sales were up 13 per cent to $335 million. Mobile phone sales rose 14 per cent to $317 million as the company added 124,000 new subscribers, of which 108,000 were prepaid customers, reflecting SingTel’s increasing market share among foreign workers.

Overall mobile subscribers rose to 1.92 million giving the company a 39 per cent market share, up one percentage point from a year ago.

Broadband subscriptions increased to 438,000, a gain of 66,000. SingTel’s share of the Internet market was 53.7 per cent, down from 54.1 per cent a year ago.

Its IT or NCS revenue rose 12 per cent to $151 million on the back of higher contribution from systems integration and product resale. NCS order books remain strong, the company said. During the quarter, it clinched a number of government contracts in Qatar, China and Hong Kong. In Singapore NCS continued to win jobs from government agencies.

At Optus, operational Ebitda – earnings before interest, tax, depreciation and amortisation – were stable at A$481 million with operational Ebitda margin down to 25.4 per cent from 26.1 per cent a year ago.

Earnings from SingTel’s regional associates on a post-tax basis increased 29 per cent to $463 million, contributing 53 per cent of the group’s underlying net profit, up from 48 per cent a year ago. Year-on-year the group’s combined mobile subscriber base ballooned 48 per cent to 136 million, the largest in Asia outside China.

Group operating expenses rose 12 per cent to $661 million. Free cash flow for the quarter was up 21 per cent to $556 million.

Operationally better

Mixed results. Singapore Telecommunications Limited (SingTel) reported its 1Q08 results with revenue of S$3.6b, +10.5% YoY and +7.2% QoQ. Net profit was reported at S$927.2m, +10.4% YoY but fell 6.3% QoQ. The underlying profit (excluding one-off items) trend was similar with annual growth at +3.7% but fell 2.1% sequentially. The sequential decline in profitability is due mainly to a high base effect as the result of the recognition of tax credit in the previous quarter. Excluding this item (i.e. at the pre-tax level), SingTel’s numbers would have grown 5.0% QoQ. As in previous results, the key earnings driver remains SingTel’s regional mobile associates. This segment grew 29.0% YoY and 11.5% QoQ. In terms of the two key operating units, Singapore operations margins improved on the back of better cost control whilst the reverse is true in Australia. The overall effect is a slight deterioration of group sequential EBITDA margin to 31.3% (from 32.9% in 4Q07).

Singapore margins improved. In Singapore, even though revenue grew by marginal 0.4% QoQ to S$1,161m, this was offset by a much stronger drop in operating expenses of 6.3% QoQ. This led to EBITDA improving to S$507m, +8.9% QoQ. This is clearly reflected in the sequential margin expansion from 42.3% to 43.7%. The good cost containment was almost across all segments. However going forward, with the recent introduction of IPTV and aggressive marketing, costs are expected to rise, hence we expect the 2H08 margins to come off. In Australia, the scene is a total opposite. Revenue grew 2.5% QoQ to A$1,898m, but was offset by increases in operating expenses of 6.6% QoQ. This led to EBITDA deteriorating 8.2% QoQ, with margins falling from 28.3% to 25.4%. The reason for the poor matrix is due to aggressive acquisition activity which increased 37% QoQ to A$159/sub.

Associates retain star status. The star performers in the quarter were again SingTel’s associates. Collectively they contributed about S$463m or by about 50% to group PATMI (from 42% in 4Q07). More importantly, with the current rate of growth, the associates are likely to dominate future earnings. In terms of importance of individual associates, Telkomsel remains dominant – making up 43% of associate contribution, followed closely by Bharti (34%).

Maintain HOLD. SingTel is a fairly defensive play with generous payout and we do not expect the trend to change. As for earnings, SingTel has guided that it expects revenue and EBITDA to continue to grow. However in terms of ratings, as SingTel is trading close to fair value of S$3.32, we maintain our HOLD rating.