1Q12F may disappoint

• SingTel may report 1Q12F earnings of S$920m (-2% YoY) on 11th Aug, slightly below street expectations.

• The key negatives would be weak Singapore earnings besides lower contribution from Bharti

• In the long term, Bharti should improve although Singapore & Australia may face more challenges. HOLD for 6% yield at 12x FY12F PE (Hist. average 13.4x)

1Q12F results on 11th Aug may be unexciting. We estimate that SingTel may report 1Q12F earnings of S$920m (-2% YoY, – 8% QoQ). This may be slightly below the street expectations of flat to low-single digit growth in earnings

Singapore earnings could be the key disappointment Management has guided for stable Singapore EBITDA in FY12F taking into account high content cost for full FY12F and competitive pressures in the enterprise broadband business. However, depreciation & amortization expenses have been rising in the light of higher capex for mobile & submarine networks along with IT infrastructure. So stable EBITDA may not translate into stable net earnings. We estimate that 1Q12F Singapore earnings could decline 15% YoY, although improve 4% QoQ. Optus earnings may decline 17% QoQ, as 4Q11 (seasonally strongest quarter) benefited from one-off cost savings.

Associate contribution can slip marginally. Bharti reported 14% QoQ decline in 1Q12 earnings, which can partly be offset by 10% QoQ growth at Telkomsel. However, overall associates’ contribution may decline 3% QoQ due to strong Singapore dollar versus regional currencies (INR & PHP).

With 3% earning growth in FY12F, investors might appreciate regular yield exceeding 6%. SingTel is trading at ~12x FY12F PE below its four-year average of 13.2x. However, we believe that SingTel may not outperform unless earnings payout ratio is raised above 80% or capital management is performed more frequently. HOLD with SOP-based TP of S$3.20.

Another step in asset monetization

Selling ducts and manholes to CityNet

SingTel took another step towards monetising its passive assets of ducts and manholes that are currently being used by OpenNet and its existing copper network. It will sell these assets and seven exchange buildings to CityNet which is the trustee manager of NetLink Trust for S$1.89bn (S$0.12/SingTel share). The assets may fetch a different valuation in 2014 when SingTel is required to sell down its interest to below 25% by Apr 2014, under its agreement with the regulator. We believe SingTel will return the proceeds to shareholders. Maintain UNDERPERFORM, nevertheless, and our SOP-based target price of S$3.19, with de-rating catalysts still expected from rising competition in Australia and cost pressures in Singapore.

The news

SingTel has announced that it will be selling its ducts and manholes used by OpenNet and seven exchange buildings to CityNet, which is the trustee-manager of NetLink Trust for S$1.89bn (Figure 1). The sale consideration will be financed by a loan from SingTel to CityNet and the issue of units of NetLink to SingTel. In addition, SingTel will:

• Pay about S$20m p.a. to use NetLink’s ducts for SingTel’s existing copper lines. This is for 25 years, with an option to renew for another 25 years.

• SingTel expects to pay another S$12m p.a. to lease space in the seven exchange buildings.

• Enter into a duct-and-manhole service agreement relating to OpenNet’s cables situated within NetLinks ducts. SingTel will pay fixed and variable charges comprising 70% of the variable charge that SingTel receives from OpenNet. The fixed charge is estimated at S$5m, S$15m and S$20m for FY12, FY13 and FY14 respectively. With effect from FY3/14, the charge is estimated at S$20m per annum. The agreement is for 25 years with an option to renew for another 25 years.

SingTel will incur additional operational and maintenance costs for NetLink which should not exceed S$20m p.a.

While SingTel is the sole holder of NetLink and retains a 100% economic interest over the business and assets, it will cease control of NetLink as CityNet will have a majority independent board of directors, and SingTel can only appoint up to 30% of the board.

Comments

Another step in asset monetisation. This development does not surprise us. It is part of the process whereby SingTel transfers its ducts and manholes to a separate company to comply with the Infocomm Development Authority’s (IDA) effective open access requirements. SingTel must sell down its interest in NetLink to less than 25% by Apr 2014.

What is new, however, is the S$1.89bn (S$0.12/share) valuation SingTel has assigned to the assets. SingTel had not indicated the valuation of these assets before.

These assets may fetch a different valuation in 2014 when SingTel is required to sell down its interest then. By that time, there could be other access seekers apart from SingTel and OpenNet, which could bolster the value of the assets. We believe SingTel is likely to return the proceeds of the selldown to below 25% to shareholders in 2014.

Positive for SingTel. We maintain that SingTel will benefit from the introduction of the next generation broadband network (NGNBN) in two ways: 1) monetisation of its passive assets; and 2) access to the nationwide fibre network that would help it level its playing field with StarHub, especially for access to residential properties.

No impact on earnings. This transaction has no impact on SingTel’s net profit as it is an internal transfer. However, revenue that it receives from the use of the ducts and manholes and all related opex will now be booked at the associate line as it no longer controls the assets.

Valuation and recommendation

We maintain our UNDERPERFORM on SingTel with an unchanged SOP-based target price of S$3.19. De-rating catalysts are still expected from rising competition in Australia, cost pressures in Singapore, and earnings dilution at Bharti from 3G start-up costs at Bharti Africa.

Another step in asset monetization

Selling ducts and manholes to CityNet

SingTel took another step towards monetising its passive assets of ducts and manholes that are currently being used by OpenNet and its existing copper network. It will sell these assets and seven exchange buildings to CityNet which is the trustee manager of NetLink Trust for S$1.89bn (S$0.12/SingTel share). The assets may fetch a different valuation in 2014 when SingTel is required to sell down its interest to below 25% by Apr 2014, under its agreement with the regulator. We believe SingTel will return the proceeds to shareholders. Maintain UNDERPERFORM, nevertheless, and our SOP-based target price of S$3.19, with de-rating catalysts still expected from rising competition in Australia and cost pressures in Singapore.

The news

SingTel has announced that it will be selling its ducts and manholes used by OpenNet and seven exchange buildings to CityNet, which is the trustee-manager of NetLink Trust for S$1.89bn (Figure 1). The sale consideration will be financed by a loan from SingTel to CityNet and the issue of units of NetLink to SingTel. In addition, SingTel will:

• Pay about S$20m p.a. to use NetLink’s ducts for SingTel’s existing copper lines. This is for 25 years, with an option to renew for another 25 years.

• SingTel expects to pay another S$12m p.a. to lease space in the seven exchange buildings.

• Enter into a duct-and-manhole service agreement relating to OpenNet’s cables situated within NetLinks ducts. SingTel will pay fixed and variable charges comprising 70% of the variable charge that SingTel receives from OpenNet. The fixed charge is estimated at S$5m, S$15m and S$20m for FY12, FY13 and FY14 respectively. With effect from FY3/14, the charge is estimated at S$20m per annum. The agreement is for 25 years with an option to renew for another 25 years.

SingTel will incur additional operational and maintenance costs for NetLink which should not exceed S$20m p.a.

While SingTel is the sole holder of NetLink and retains a 100% economic interest over the business and assets, it will cease control of NetLink as CityNet will have a majority independent board of directors, and SingTel can only appoint up to 30% of the board.

Comments

Another step in asset monetisation. This development does not surprise us. It is part of the process whereby SingTel transfers its ducts and manholes to a separate company to comply with the Infocomm Development Authority’s (IDA) effective open access requirements. SingTel must sell down its interest in NetLink to less than 25% by Apr 2014.

What is new, however, is the S$1.89bn (S$0.12/share) valuation SingTel has assigned to the assets. SingTel had not indicated the valuation of these assets before.

These assets may fetch a different valuation in 2014 when SingTel is required to sell down its interest then. By that time, there could be other access seekers apart from SingTel and OpenNet, which could bolster the value of the assets. We believe SingTel is likely to return the proceeds of the selldown to below 25% to shareholders in 2014.

Positive for SingTel. We maintain that SingTel will benefit from the introduction of the next generation broadband network (NGNBN) in two ways: 1) monetisation of its passive assets; and 2) access to the nationwide fibre network that would help it level its playing field with StarHub, especially for access to residential properties.

No impact on earnings. This transaction has no impact on SingTel’s net profit as it is an internal transfer. However, revenue that it receives from the use of the ducts and manholes and all related opex will now be booked at the associate line as it no longer controls the assets.

Valuation and recommendation

We maintain our UNDERPERFORM on SingTel with an unchanged SOP-based target price of S$3.19. De-rating catalysts are still expected from rising competition in Australia, cost pressures in Singapore, and earnings dilution at Bharti from 3G start-up costs at Bharti Africa.

SINGAPORE – Singapore Telecommunications said it will to inject S$1.89 billion (US$1.56 billion) worth of infrastructure assets to the trustee-manager of NetLink Trust, a business trust owned by the firm.

SingTel is the sole unitholder of NetLink Trust, whose trustee-manager is CityNet Infrastructure Management. CityNet is a wholly-owned subsidiary of CitySpring Infrastructure Trust.

SINGAPORE – Singapore Telecommunications said it will to inject S$1.89 billion (US$1.56 billion) worth of infrastructure assets to the trustee-manager of NetLink Trust, a business trust owned by the firm.

SingTel is the sole unitholder of NetLink Trust, whose trustee-manager is CityNet Infrastructure Management. CityNet is a wholly-owned subsidiary of CitySpring Infrastructure Trust.