SingTel Q1 profit down 2.9% at $916m

Associate Bharti Airtel continues to weigh down its bottom line

Singapore Telecommunications’ first- quarter net profit dipped 2.9 per cent to $916 million, from $943 million last year as Indian associate Bharti Airtel continued to weigh down its bottom line.

Earnings per share for the three months ended June 30 slid to 5.75 cents, from 5.92 cents in 2010 while operating revenue rose 7.4 per cent to $4.6 billion during the period.

South-east Asia’s largest telco, which derives 77 per cent of its Ebitda – earnings before interest, tax, depreciation and amortisation – from overseas, was hit by a 10 per cent decline in pre-tax earnings contributions from its regional associates.

Its largest overseas foray, Bharti, was again the main culprit. Pre-tax contributions from the Indian operator dived 27 per cent to $154 million in the first-quarter due to a combination of higher domestic taxes as well as sustained losses in South Africa.

Bharti completed the acquisition of the African assets of Kuwaiti conglomerate Zain Group in the first quarter of last year.

Since then, SingTel’s quarterly profits have been repeatedly dampened by the financing costs associated with the mammoth US$10.7 billion buyout, However, there are fresh signs that the situation is on the mend.

‘Its (Bharti’s) transformation and restructuring plans (in South Africa) are going well,’ SingTel group chief executive officer Chua Sock Koong told reporters at a media conference yesterday.

According to SingTel’s international CEO Hui Weng Cheong, Bharti has been steadily growing its revenue and Ebitda in South Africa on the back of higher customer numbers and usage levels.

In India, the ‘downside’ in the first quarter was largely due to fair-value losses, higher taxes and the amortisation of Bharti’s 3G license fees, he explained.

Besides Bharti, contributions from Telkomsel also fell in the first quarter.

The share of pre-tax profits from SingTel’s Indonesian associate slid 4.8 per cent to $210 million due to weakening of the rupiah against the Singapore dollar.

Pakistani operator Warid and PBTL in Bangladesh continued to be in the red, with respective pre-tax losses of $12 million and $6 million.

Their decline was mitigated by improvements at SingTel’s associates in the Philippines and Thailand.

Pre-tax profit contributions from Globe and AIS climbed 10.3 per cent and 13 per cent to $49 million and $77 million respectively in Q1.

Optus, which accounts for 30 per cent of SingTel’s Ebitda, grew its first quarter net profit by 2.2 per cent to $213 million despite facing cutthroat competition.

In Australia, mobile operators have resorted to slashing tariffs to gain ground, Ms Chua said.

The appreciation of the Australian dollar also helped to cushion the impact of the price war on Optus’ first-quarter performance, she added.

Net profit from SingTel’s Singapore operations fell 11.7 per cent on year to $328 million as a result of higher pay-television content and service costs.

During the quarter, the group added a record 57,000 postpaid mobile subscribers to take its cellular customer base to 3.42 million.

It also grew its mio-TV tally by 21,000 users to 313,000 ahead the Barclays Premier League kickoff this weekend. Pay-TV contributed $23 million to the topline of its Singapore operations in Q1, the firm said.

On the home front, SingTel is expecting revenue boon from the disposal of its Internet assets over coming years.

Last month, the operator hived off some $1.89 billion in passive broadband infrastructure that is being used for the government- backed Next-Gen NBN (National Broadband Network). These assets, which include manholes, ducts and exchange buildings, are now held under a newly-minted Netlink Trust, which counts SingTel as the sole unit holder for now.

However, local authorities have ordered the firm to pare down its stake to less than 25 per cent by April 2014.

SingTel is looking at various options to meet this requirement. These include a possible initial public offering for Netlink Trust. It could also sell its stake to partners, Ms Chua said.

SingTel shares closed three cents lower at $2.92 yesterday.

Soft 1Q12 underlying earnings; but still defensive

1Q12 results slightly short. SingTel reported its 1Q12 results this morning, with revenue rising 7.4% YoY (but down 0.8% QoQ) to S$4605.2m, or around 0.7% ahead of our forecast, with both Singapore and Australian businesses recording healthy revenue growth. While operating EBITDA also grew by 2.3% YoY, it fell 7.7% QoQ to S$1284.1m; this as Optus recorded seasonally lower EBITDA across all business segments (including impact of a writeback of outpayment provision in 4Q11). Also lower was the overall operating EBITDA margin, which slipped from 29.3% in 1Q11 to 27.9% in 1Q12; this was mainly due to the 4.7 percentage point (ppt) fall in Optus’ margin, but mitigated by the 3.2 ppt recovery in Singapore. Reported net profit slipped 2.9% YoY and 7.6% QoQ to S$916.2m, but underlying earnings saw a bigger 7.4% YoY and 12.5% QoQ slump to S$873.0m, falling 11.8% short of our estimate; this mainly due to an exceptional item of S$61m.

Softer associates showing due to forex. Associates pretax profits fell 9.2% YoY and 2.7% QoQ to S$500m; negatively impacted by foreign exchange movements. SingTel noted that major regional currencies depreciated between 4.7% and 18.9% YoY or down some 1.7-6.5% QoQ (with the exception of IDR which rose 0.7%). Even in constant FX term, SingTel revealed that associate pre-tax earnings eased by 3.1% YoY; the drag coming mainly from Bharti, which fell 20% YoY in local currency terms, as earnings were impacted by higher interest costs, depreciation and reduction of tax holiday benefits.

Maintains FY12 guidance. Nevertheless, SingTel has retained its guidance for FY12. For Singapore, it expects operating revenue to growth at low single-digit level, driven by higher mobile and mio TV revenue; it also expects operating EBITDA to be stable (achieved 35.2% margin in FY11); capex to be ~S$900m (upgrade mobile data network etc) and free cashflow to come in ~S$1.3b. For Australia, it expects operating revenue and EBITDA to grow at low single-digit levels; it also expects to generate free cashflow of A$1b after spending A$1.2b on capex. On the associates front, SingTel expects ordinary dividends to remain stable (came in ~S$2,141m in FY11).

Maintain BUY. Given that 1Q12 underlying earnings met only 21.6% of our full-year forecast, we reduce our FY12 estimate by 3.6% (FY13 by 3.5%) to incorporate softer margin assumptions for Optus and also lower associate contributions. But because of the higher market value of its associates, our fair value remains unchanged at S$3.64. We also continue to like SingTel for its defensive earnings. Maintain BUY.

Soft 1Q12 underlying earnings; but still defensive

1Q12 results slightly short. SingTel reported its 1Q12 results this morning, with revenue rising 7.4% YoY (but down 0.8% QoQ) to S$4605.2m, or around 0.7% ahead of our forecast, with both Singapore and Australian businesses recording healthy revenue growth. While operating EBITDA also grew by 2.3% YoY, it fell 7.7% QoQ to S$1284.1m; this as Optus recorded seasonally lower EBITDA across all business segments (including impact of a writeback of outpayment provision in 4Q11). Also lower was the overall operating EBITDA margin, which slipped from 29.3% in 1Q11 to 27.9% in 1Q12; this was mainly due to the 4.7 percentage point (ppt) fall in Optus’ margin, but mitigated by the 3.2 ppt recovery in Singapore. Reported net profit slipped 2.9% YoY and 7.6% QoQ to S$916.2m, but underlying earnings saw a bigger 7.4% YoY and 12.5% QoQ slump to S$873.0m, falling 11.8% short of our estimate; this mainly due to an exceptional item of S$61m.

Softer associates showing due to forex. Associates pretax profits fell 9.2% YoY and 2.7% QoQ to S$500m; negatively impacted by foreign exchange movements. SingTel noted that major regional currencies depreciated between 4.7% and 18.9% YoY or down some 1.7-6.5% QoQ (with the exception of IDR which rose 0.7%). Even in constant FX term, SingTel revealed that associate pre-tax earnings eased by 3.1% YoY; the drag coming mainly from Bharti, which fell 20% YoY in local currency terms, as earnings were impacted by higher interest costs, depreciation and reduction of tax holiday benefits.

Maintains FY12 guidance. Nevertheless, SingTel has retained its guidance for FY12. For Singapore, it expects operating revenue to growth at low single-digit level, driven by higher mobile and mio TV revenue; it also expects operating EBITDA to be stable (achieved 35.2% margin in FY11); capex to be ~S$900m (upgrade mobile data network etc) and free cashflow to come in ~S$1.3b. For Australia, it expects operating revenue and EBITDA to grow at low single-digit levels; it also expects to generate free cashflow of A$1b after spending A$1.2b on capex. On the associates front, SingTel expects ordinary dividends to remain stable (came in ~S$2,141m in FY11).

Maintain BUY. Given that 1Q12 underlying earnings met only 21.6% of our full-year forecast, we reduce our FY12 estimate by 3.6% (FY13 by 3.5%) to incorporate softer margin assumptions for Optus and also lower associate contributions. But because of the higher market value of its associates, our fair value remains unchanged at S$3.64. We also continue to like SingTel for its defensive earnings. Maintain BUY.

Flip Flop from Optus

At a Glance

• 1Q12 underlying profit of S$873m (-7% YoY, -13% QoQ) was 5% below ours and 8% below consensus

• Optus was the key disappointment especially after posting impressive earnings in 4Q11

• Management maintained its EBITDA guidance for Singapore & Australia. HOLD for 6% yield at 12x FY12F PE (historic average 13.4x)

Flip flop from Optus. Optus’ net profit of A$174m (+2.5% YoY, -33% QoQ) was significantly below expectations. 1Q12 EBITDA of A$560m saw a sharp decline of 17% QoQ from a seasonally strong 4Q11 as EBITDA margins declined to 24.2% from 28.9% in 4Q11, even lower than 24.5% in 1Q11. Optus continues to face pricing pressure from competitors in the mobile segment. This was also reflected in blended ARPU decline of 2.8% QoQ to A$45. This may imply risk to Optus’ FY12F guidance of low-single digit growth in EBITDA, in the light of exceptionally high EBITDA base in 4Q11. A potentially lower mobile termination rate is also a risk for Optus.

Singapore performance was inline. Singapore’s net profit of S$328m (-12% YoY, +8% QoQ) was largely inline keeping in mind that higher content cost was absent in 1Q11. With 1Q12 EBITDA of S$567m (-4% YoY, +3% QoQ) there is little risk to stable EBITDA guidance.

Associate contribution hit by weak Bharti and strong SGD. Associate net profit contribution of S$362m (-12% YoY, -4% QoQ) continued to decline as Bharti’s earnings contribution of S$103m declined by 37% YoY and 20% QoQ. Strong Singapore dollar versus Indian Rupee, Indon Rupiah, Thai Baht and Philippine Peso further dragged earnings.

With 3% earning growth in FY12F, investors might appreciate regular yield exceeding 6%. Our FY12F earnings are 2% below consensus already. SingTel may not outperform unless earnings payout ratio is raised above 80% or capital management is performed more frequently in our view.