Lower guidance on 1HFY13 miss

1H13 core net profit missed CIMB and consensus estimates by 3% and 10% respectively as Bharti disappointed. SingTel maintains its overall guidance but has lowered Optus’sFY13 revenue, citing competition and reduced mobile-termination rates.

DPS was 6.8cts (62% payout of 1HFY13), unchanged yoy. 3QFY13 is likely to be weaker due to higher iPhone-related subsidies. We maintain our Underperform and SOP-based target price pending its conference call later this morning. Likely de-rating catalysts are earnings disappointments and adverse regulatory developments in India.

Amobee losses dragged down Singapore

Singapore met expectations, with EBITDA up 2.1% yoy. EBITDA would have risen 4.7% if start-up losses from Amobee were excluded. SingTel continued to gain mobile market share up, 0.7% pt qoq. It also continued to dominate fibre broadband, capturing 58% of net adds.

Optus a little below forecast, lowers guidance

Optus’s revenue was a little below our forecast, with 3Q being key to FY13’s performance. Its 2QFY13 4.2% yoy fall in revenue mainly resulted from a 5.1% decline in mobile revenue. Incoming mobile revenue slid 13.1% yoy, due to a well-known fall in mobile-termination rates. However, outgoing mobile revenue also fell 1.7% from a 10% decline in postpaid ARPU, led by dilution from mobile broadband. Mobile margins continued to climb as SACs fell and, we think, with better network utilisation from mobile data. Revenue from the two other businesses declined with a 7.5% yoy fall in EBITDA for the consumer division. With mobile dominating, Optus’s 2Q13 EBITDA was flat yoy. However, it has lowered its revenue outlook from low-single-digit growth to a low-single-digit decline though it maintained its guidance of stable EBITDA.

Bharti disappointed

Most of SingTel’s associates beat our expectations except for Bharti, which came in 29% below as D&A and interest expense surprised.

Lower guidance on 1HFY13 miss

1H13 core net profit missed CIMB and consensus estimates by 3% and 10% respectively as Bharti disappointed. SingTel maintains its overall guidance but has lowered Optus’sFY13 revenue, citing competition and reduced mobile-termination rates.

DPS was 6.8cts (62% payout of 1HFY13), unchanged yoy. 3QFY13 is likely to be weaker due to higher iPhone-related subsidies. We maintain our Underperform and SOP-based target price pending its conference call later this morning. Likely de-rating catalysts are earnings disappointments and adverse regulatory developments in India.

Amobee losses dragged down Singapore

Singapore met expectations, with EBITDA up 2.1% yoy. EBITDA would have risen 4.7% if start-up losses from Amobee were excluded. SingTel continued to gain mobile market share up, 0.7% pt qoq. It also continued to dominate fibre broadband, capturing 58% of net adds.

Optus a little below forecast, lowers guidance

Optus’s revenue was a little below our forecast, with 3Q being key to FY13’s performance. Its 2QFY13 4.2% yoy fall in revenue mainly resulted from a 5.1% decline in mobile revenue. Incoming mobile revenue slid 13.1% yoy, due to a well-known fall in mobile-termination rates. However, outgoing mobile revenue also fell 1.7% from a 10% decline in postpaid ARPU, led by dilution from mobile broadband. Mobile margins continued to climb as SACs fell and, we think, with better network utilisation from mobile data. Revenue from the two other businesses declined with a 7.5% yoy fall in EBITDA for the consumer division. With mobile dominating, Optus’s 2Q13 EBITDA was flat yoy. However, it has lowered its revenue outlook from low-single-digit growth to a low-single-digit decline though it maintained its guidance of stable EBITDA.

Bharti disappointed

Most of SingTel’s associates beat our expectations except for Bharti, which came in 29% below as D&A and interest expense surprised.

Bharti’s 2QFY13 letdown

2QFY13 core net profit for Bharti, SingTel’s associate, came in 37% below consensus estimates that form the basis of our forecast. This was due to an unexpected surge in depreciation and higher interest expense in Africa. Its operational performance was well within expectations.

We maintain our SOP-based target price and Underperform call on SingTel. Likely de-rating catalysts include additional negative regulatory developments in India and weaker regional currencies. SingTel will release its 2QFY13 results on 14 Nov. We prefer StarHub for its attractive dividends.

What Happened

Bharti Airtel, SingTel’s 30.8% associate, released its 2QFY13 results and held its conference call earlier today. 2QFY13 core net profit for Bharti came in 37% short of consensus estimates that form the basis of our forecast. This was mainly due to surge in depreciation costs and finance costs in Africa.

Despite a seasonally weak quarter, revenues rose 4.8% qoq, lifted by a 77% yoy jump in mobile data and a 24% yoy rise from Africa revenues. Africa’s subscriber base increased by 21% yoy and 5% qoq. India’s ARPUs slid 4.3% qoq due to competition. Opex rose sharply by 19% yoy as the group continued expanding its networks in India and Africa. EBITDA margin grew 1.1% pts qoq, with an improvement in Africa offset by lower margins in India.

Management is optimistic that voice pricing will improve sooner than later as it sees that most of the sector levies have been priced in and should rebound once the 2G auction is over. India’s 2G auction is slated to take place on 12 Nov.

What We Think

We think Bharti’s results were poor and would not contribute to any price catalyst for SingTel. We are surprised by Africa’s strong operational improvement. However, India continues to remain a key risk area, given the highly uncertain regulatory environment and weakening rupee.

What You Should Do

We advocate investors to switch into StarHub in light ofits potential for higher dividends. We believe that investors should demand a higher yield for SingTel, given its higher risk profile and more volatile earnings.

India 3G roaming – To ban or not to ban?

Ban or no ban: who knows? India’s proposed ban on 3G roaming alliances between domestic telcos is only the latest uncertainty in a telecom market already famous for regulatory earthquakes. However, the impact is minimal for a couple of reasons. One, 3G subscribers form just 2-3% of the total number of mobile phone users in India, hence the impact on earnings is relatively small, and two, SingTel and Axiata are insulated by their minority stakes in their Indian associates. We maintain SELLs on SingTel (TP SGD3.03) and Idea (TP Rs68) and BUYs on Axiata (TP MYR7.30) and Bharti Airtel (TP Rs400). We like Bharti for its improving FCF and earnings profile, and Axiata for potential surprises in earnings and dividends.

3G roaming pact ban notices served. Bharti Airtel, along with Idea and Vodafone, said this week that they has received a notice from DoT, the Indian telecom regulator, to stop offering 3G roaming in areas (or “circles”) that it does not have 3G spectrum rights within 60 days. In 2010, Bharti won 3G licences in 13 of the total 22 telecom circles for USD2.3b. In 2011, it entered into 3G roaming agreements with Vodafone and Idea (part of Axiata), giving it a 3G presence in the whole of India. DoT claims that by doing this, the government is not receiving its just dues, and wants it stopped.

Telcos are appealing. Naturally, the telcos are appealing against the decision. They claim that there was no specific provision made against roaming pacts when the 3G licences were sold in 2010.

Not a big deal, as 3G subscribers in India are a rare breed. In total, 3G subscribers only account for 2-3% of the total number of mobile subscribers in the country, which hit 672m active users as at Aug 2012. The biggest 3G mobile telco players in India by subscriber size are Reliance Communications (RCOM), Bharti Airtel, Idea Cellular and Vodafone. We estimate Bharti has 5.1m “active” 3G subscribers, followed by Reliance with 4m and Idea with 3.1m. Vodafone has the smallest subscriber base.

Old news, but this is getting old. A possible ban on such 3G roaming pacts is not new, as there has already been numerous warnings since Dec 2011. Given that 2G roaming is allowed, Ganesh Ram our telco analyst in India believes the regulator will eventually also allow the 3G pacts to continue with some modifications. Nevertheless, this creates further uncertainty in a market fraught with regulatory stress lines, most recently being the cancellation of 122 2G licences earlier in 2012.

Minimal impact on Bharti and Idea, as well as their parent companies. If the 3G ban is implemented, Ganesh estimates the earnings impact on Bharti to be negligible. For Idea, the impact will be larger at Rs600m or Rs0.18/share, 8% of his FYMar13 forecast. Ganesh has a BUY on Bharti (TP Rs400) and a SELL on Idea (TP Rs68). As SingTel owns only 15.9% of Bharti Airtel directly and Axiata owns a mere 19.7% of Idea, the impact on SingTel (SELL, TP SGD3.03) and Axiata (BUY, TP MYR7.30) are also negligible.

SHARE SALE MINOR HICCUP

• Temasek selling 400m shares
  
• Temporary knee-jerk reaction
  
• Adding value to mobile business
  

Temasek selling 400m shares

Temasek Holdings has entered into an agreement to sell 400m shares in SingTel as part of its portfolio rebalancing. We understand that it has a upsize option to sell another 100m shares. According to newswire reports, the share sale was done at S$3.20 each, which is a 3.9% discount to Tuesday’s S$3.33 close, and also at the lower end of the indicative S$3.20-3.25 range. As expected, the news resulted in a negative knee-jerk reaction, causing SingTel’s share price to open some 5.1% lower at S$3.16.

Not indicative of SingTel’s business prospects

Meanwhile, Business Times reported that the sale was a result of a “reverse inquiry” from bankers, suggesting that the move is more opportunistic (given that the share price has risen 6.7% YTD) rather than a direct reflection of SingTel’s business prospects. In any case, we note that Temasek will be barred from selling more shares for 120 days after completing the sale. Temasek will hold a 51.3% stake in SingTel (assuming 500m shares are sold), and the telco will remain the largest company in its portfolio by market capitalization.

Good demand for iPhone 5

Separately, demand for the new iPhone 5 over the weekend has been very positive. We visited several SingTel outlets – including some of its competitors – and the queues were very long indeed. While the higher subsidies for the iPhone 5 may initially weigh on margins, the new contracts with less generous data bundles and the faster LTE access speed should eventually bump up ARPU and margins. SingTel has also made several acquisitions in the mobile service space – the latest being a S$3m stake in mobile game firm – and this should allow it to add value to its mobile business.

Maintain BUY with S$3.61 fair value

Despite the negative knee-jerk reaction, we believe that investors should not read too much into the share sale. Instead, we continue to like its defensive business and relatively decent dividend yield of ~5%. Maintain BUY with an unchanged S$3.61 fair value.