Poor start to the year

Still on the wrong side of key trends. We expect SingTel to continue to face margin, competitive and currency headwinds in FYMar2013. The best that can be said is that earnings are likely to be stable, hence we have trimmed our forecasts only slightly despite a below expectations first quarter. However, the same cannot be said of cashflow, as capex is expected to rise on the back of 4G rollout and potentially expensive 4G spectrum auctions. Moreover, net debt/EBITDA is high at 1.1x. Against this backdrop, we see no upside for dividends. Maintain SELL.

Below expectations. SingTel reported underlying net profit of SGD850m, down 2.5% YoY and 16.9% QoQ, in 1Q13. The main culprits were escalating subscriber acquisition and retention costs in Singapore, a poor showing by Optus in Australia due to structural changes in its business, and headwinds from regional currencies in particular the rupee, rupiah and Australian dollar. 1Q13 results included an exceptional gain of SGD119m from the sale of Far EasTone stake.

No upside for earnings. SingTel has maintained its outlook of low single digit growth in revenue and flat EBITDA, implying a squeeze on margins, for both its Singapore and Australian businesses. In line with our expectations of muted performance for its associates, 1Q13 share of associates were flat YoY at SGD506m, about 40% of group pretax profit. Better results from AIS, Globe, Telkomsel and Bharti Africa were

offset by weakness in core Bharti markets.

Potential downside for cashflow. We expect free cashflow (excluding dividends from associate) to fall from SGD2.5b in FYMar2012 to SGD2.4b in FYMar2013 on the back of acquisitions, 4G network rollout in Singapore and Australia, rollout of cloud computing services for enterprises and a potentially expensive bid for BPL. There is potential downside to FCF as SingTel’s capex guidance does not include 4G spectrum auction costs in Singapore and Australia.

Maintain SELL with SOTP-derived TP of SGD3.03. Our target price for SingTel has risen on the back of higher target prices for Globe, AIS and Bharti in recent weeks. However, we prefer M1 for telco exposure as it offers a superior yield of 5.6% at current levels.

• Strip out the exceptionals (largely gain from sale of AFS Investments), underlying profit actually fell 3%, instead of the 3% gain as reported for Q1 ended Jun '12.
• Optus Australia and pedestrian performance by associates (dragged down by Bharti of India, which recently reported a sharp earnings slide) are to blame,
• We remain Neutral, preferring StarHub for its more attractive yield: 5.4% at $3.72 vs Sing Tel's 4.7% based on 15.8 cents paid in respect for ye Mar '12.
• The recent strong performance of Sing Tel: share price hitting a high of $3.62 after a clear dividend policy was spelled out, is largely over.

SLOW FY13 START; LOWER S$3.61 FV

• Core earnings 22% of FY13
• Hit by weaker regional currencies
• BUY as total return >10%

Soft FY13 start

SingTel reported its 1QFY13 results this morning, with revenue falling 1.6% YoY to S$4533.0m, meeting around 24% of our full-year forecast; impacted by the 3% depreciation in the AUD against the SGD. Reported net profit came in around S$945.3m, up 3.2% YoY, which included an exceptional gain of S$102.2m. Core net profit (excluding exceptional items) slipped 2.6% YoY to around S$850.0m, or 22% of our FY13 estimate. On a sequential basis, revenue fell 5.2% and core earnings was down 16.9%.

Regional currencies take toll on associate earnings

One of the key reasons for the fall was due to lower Associates' net contribution, which fell 14.7% YoY to S$354.0m, mainly due to the weakening of the regional currencies (especially INR and IDR against the SGD). But on a constant regional currency terms, pre-tax Associates' contribution grew 5.6%, where strong operating performance from Telkomsel and AIS partially offset Bharti Airtel's weaker results.

Reaffirms FY13 guidance

SingTel expects consolidated revenue in FY13 to grow at a low single digit level and EBITDA to remain stable; although this implies potential EBITDA margin pressure, which could arise from initial startup costs associated with its Group Digital Life segment. Meanwhile, free cash flow (excluding associate dividends) is estimated to be around S$2.6b, after allocating S$950m of capex in Singapore and A$1.1b in Australia. SingTel also expects ordinary dividends from regional mobile associates to grow and its own dividend payout ratio to be maintained at 55-70%.

Lower S$3.61 fair value

While 1Q results were slightly below forecast, we opt to leave our FY13 estimates unchanged for now. However, our SOTP-based fair value drops from S$3.68 to S$3.61 to reflect the recent drop in Bharti Airtel's share price. But as the total return from here is still >10%, we maintain our BUY rating.

Bharti confirms intense competition

• Bharti’s earnings were 37% below consensus estimate due to intensified competition
  
• Bharti to remain aggressive in maintaining its revenue share. SingTel’s FY13F/14F trimmed 2%/3%.
  
• HOLD with lower TP of S$3.25. Near-term cost pressures from mobile advertising in Singapore is another concern
  

Bharti hurt by rising competition with net profits 37% below expectations. 1Q13 profit of Rs.7.6bn (-37% y-o-y and -34% q-o-q) was 37% below consensus expectations of Rp12.15bn due to a sharp decline in EBITDA margins in India to 31.8% from 35.3% in March 2012, because of rising expenses. High depreciation and finance expenses in Africa had resulted in losses from Africa widening by 120% y-o-y to Rs. 6.7bn.

We had highlighted rising competition in our note on 2 July. Indian operators, including Bharti had lowered tariffs to 0.5 paisa per sec from 1.0 paisa through discount vouchers. At the same time, dealer commissions have also been raised substantially.

SingTel’s earnings trimmed slightly. Bharti is not willing to lose revenue share and intends to remain aggressive in preventing that from happening. We have lowered Bharti’s FY13F/14F earnings by 30% each, implying flat earnings in FY13F (with downside risks). After raising contribution from AIS and Telkomsel slightly, our SingTel’s FY13/14F earnings are trimmed 2%/3% respectively.

Maintain HOLD with slightly lower TP of S$3.25. The key change is lower valuation for Bharti based on the market price of Rs 255 per share. For SingTel, dividend yield of 5% remains the key attraction as growth is not exciting enough.

Bharti confirms intense competition

• Bharti’s earnings were 37% below consensus estimate due to intensified competition
  
• Bharti to remain aggressive in maintaining its revenue share. SingTel’s FY13F/14F trimmed 2%/3%.
  
• HOLD with lower TP of S$3.25. Near-term cost pressures from mobile advertising in Singapore is another concern
  

Bharti hurt by rising competition with net profits 37% below expectations. 1Q13 profit of Rs.7.6bn (-37% y-o-y and -34% q-o-q) was 37% below consensus expectations of Rp12.15bn due to a sharp decline in EBITDA margins in India to 31.8% from 35.3% in March 2012, because of rising expenses. High depreciation and finance expenses in Africa had resulted in losses from Africa widening by 120% y-o-y to Rs. 6.7bn.

We had highlighted rising competition in our note on 2 July. Indian operators, including Bharti had lowered tariffs to 0.5 paisa per sec from 1.0 paisa through discount vouchers. At the same time, dealer commissions have also been raised substantially.

SingTel’s earnings trimmed slightly. Bharti is not willing to lose revenue share and intends to remain aggressive in preventing that from happening. We have lowered Bharti’s FY13F/14F earnings by 30% each, implying flat earnings in FY13F (with downside risks). After raising contribution from AIS and Telkomsel slightly, our SingTel’s FY13/14F earnings are trimmed 2%/3% respectively.

Maintain HOLD with slightly lower TP of S$3.25. The key change is lower valuation for Bharti based on the market price of Rs 255 per share. For SingTel, dividend yield of 5% remains the key attraction as growth is not exciting enough.