Bharti outlook better as price war recedes

(NEW DELHI) The focus for Bharti Airtel will be to maintain profit margins as a vicious price war recedes, after India’s top telecoms firm reported that quarterly profits fell by a third.

Facing tough competition in a crowded home market, Bharti, an associate of Singapore Telecommunications, is betting on opportunities in Africa, where the mobile penetration level at 32 per cent is less than India’s 54 per cent and there are fewer competitors.

Bharti’s results included its new African operations, which were on its balance sheet for only 23 days in the quarter ended June. Bharti acquired the business from Kuwaiti telecoms group Zain for US$9 billion in June and became the world’s fifth-biggest mobile operator.

After call prices in India tumbled to as low as 0.4 US cents a minute – with most of the price declines taking place in the second half of 2009 – there were no big price cuts in April-June.

Bharti’s earnings before interest, taxes, depreciation and amortisation margin was 36.9 per cent in April-June, compared with 41.3 per cent a year ago.

Bharti said that net profit fell to 16.82 billion rupees (S$490 million) under international accounting standards for its first quarter ended June, from 24.75 billion rupees a year ago.

Derivatives and exchange fluctuations led to a loss of 2.16 billion rupees as the US dollar strengthened. Bharti had a forex gain of 2.79 billion rupees a year ago. Total revenue rose to 122.31 billion rupees from 104.14 billion rupees. — Reuters

1Q11 Result Preview

Result Date:

• Thursday, 12 August 2010, approximately 9:30am (AEST).

GS&PA Estimates:

• N/a.

Trading Comment:

• SingTel’s key Associates will have reported their June quarter results by the time SingTel reports its 1Q11. Thus, the focus will be on the performance of SingTel’s Singapore and Australian businesses.

Look Out For:

• Singapore: At the FY10 result, SingTel gave subdued guidance for Singapore, with FY11 revenues expected to grow mid-single-digit and EBITDA expected to decline low-to-mid-single-digit. This is despite robust economic conditions (1Q10 GDP +25.1%, 4Q09 +11.0%, 3Q09 -4.6%, 2Q09 -12.4%, 1Q09 -15.5%). We expect to see: (1) robust WBB growth offset by slower mobile net adds; (2) a continued slowdown in fixed line; and (3) rising costs for SingTel’s new initiatives (e.g. mio TV). We may also get clarity on how SingTel expects its financials to look (margins, capex, etc.) in an NBN world.

• Australia: At the FY10 result, SingTel guided to mid-single-digit growth in sales and EBITDA in FY11. We expect to see broadly similar sales trends to previous results in 1Q11 – Mobile strong, Business and Wholesale flattish, Consumer and SME down. Our focus will be Optus Mobile (c. 70% of Optus EBITDA), specifically: (1) whether Optus Mobile has maintained its double-digit revenue growth momentum; (2) whether Telstra’s renewed vigour has had an impact on net adds; and (3) whether Optus Mobile has managed to drive earnings growth and margins.

• Associates: Following a robust recovery in FY10 (associates contribution +19.2% in FY10 cf. FY09 -21.6%) we expect growth in SingTel’s Associates earnings to slow in FY11. To date, both Telkomsel (NPAT -14.5%) and Globe (NPAT -27.5%) have reported weaker June quarter results. We also expect Bharti’s profit results (reports 11 Aug) to remain challenged given: (1) the impact of the price war; and (2) costs associated with the Zain acquisition.

Weakness in the underlying results is likely to be offset to some extent by the stronger Indonesian Rupiah.

1Q11 Result Preview

Result Date:

• Thursday, 12 August 2010, approximately 9:30am (AEST).

GS&PA Estimates:

• N/a.

Trading Comment:

• SingTel’s key Associates will have reported their June quarter results by the time SingTel reports its 1Q11. Thus, the focus will be on the performance of SingTel’s Singapore and Australian businesses.

Look Out For:

• Singapore: At the FY10 result, SingTel gave subdued guidance for Singapore, with FY11 revenues expected to grow mid-single-digit and EBITDA expected to decline low-to-mid-single-digit. This is despite robust economic conditions (1Q10 GDP +25.1%, 4Q09 +11.0%, 3Q09 -4.6%, 2Q09 -12.4%, 1Q09 -15.5%). We expect to see: (1) robust WBB growth offset by slower mobile net adds; (2) a continued slowdown in fixed line; and (3) rising costs for SingTel’s new initiatives (e.g. mio TV). We may also get clarity on how SingTel expects its financials to look (margins, capex, etc.) in an NBN world.

• Australia: At the FY10 result, SingTel guided to mid-single-digit growth in sales and EBITDA in FY11. We expect to see broadly similar sales trends to previous results in 1Q11 – Mobile strong, Business and Wholesale flattish, Consumer and SME down. Our focus will be Optus Mobile (c. 70% of Optus EBITDA), specifically: (1) whether Optus Mobile has maintained its double-digit revenue growth momentum; (2) whether Telstra’s renewed vigour has had an impact on net adds; and (3) whether Optus Mobile has managed to drive earnings growth and margins.

• Associates: Following a robust recovery in FY10 (associates contribution +19.2% in FY10 cf. FY09 -21.6%) we expect growth in SingTel’s Associates earnings to slow in FY11. To date, both Telkomsel (NPAT -14.5%) and Globe (NPAT -27.5%) have reported weaker June quarter results. We also expect Bharti’s profit results (reports 11 Aug) to remain challenged given: (1) the impact of the price war; and (2) costs associated with the Zain acquisition.

Weakness in the underlying results is likely to be offset to some extent by the stronger Indonesian Rupiah.

1Q FY11 results preview: associates offset Optus’s strength

What has changed?

• Singapore Telecom (SingTel) is scheduled to announce its 1Q FY11 results on 12 August 2010. We expect the company to reaffirm its FY11 guidance.

Impact

• The numbers. We forecast 1Q FY11 net profit to decline by 1% YoY as we expect the contribution from associates to be a drag on the company’s overall profitability, despite likely positives including a strong performance by subsidiary Optus (Not listed) and favourable currency fluctuations.

• Optus expected to shine. We believe the solid mobile revenue-growth trend of the past few quarters is set to continue, and forecast the EBITDA margin to rise by 1.5 percentage points year-on-year for 1Q FY11.

• Singapore EBITDA expected to be flat. Despite our expectation of strong revenue growth, driven by mobile and IT divisions, we expect the EBITDA margin to fall due to a changing business mix and a likely increase in pay-TV costs.

• Looking for associates to remain a drag. We expect a 15% YoY decline in the pre-tax earnings of associates. We think this will be driven by margin erosion at Telkomsel (Not listed) as a result of a rise in network expenses.

Valuation

• We maintain our 3 (Hold) rating and sum-of-the-parts-based six-month target price of S$3.09.

Catalysts and action

• A rejuvenated Optus is a bright spot, but we are concerned about the outlook for the company’s associates, which accounted for 48% of SingTel’s FY10 EPS. Based on our estimates, the core (Singapore and Optus) business is trading at a market-implied valuation of S$1.64/share. This is a 10% premium to our S$1.44 fair-value estimate, and is unattractive in our view.

1Q FY11 results preview: associates offset Optus’s strength

What has changed?

• Singapore Telecom (SingTel) is scheduled to announce its 1Q FY11 results on 12 August 2010. We expect the company to reaffirm its FY11 guidance.

Impact

• The numbers. We forecast 1Q FY11 net profit to decline by 1% YoY as we expect the contribution from associates to be a drag on the company’s overall profitability, despite likely positives including a strong performance by subsidiary Optus (Not listed) and favourable currency fluctuations.

• Optus expected to shine. We believe the solid mobile revenue-growth trend of the past few quarters is set to continue, and forecast the EBITDA margin to rise by 1.5 percentage points year-on-year for 1Q FY11.

• Singapore EBITDA expected to be flat. Despite our expectation of strong revenue growth, driven by mobile and IT divisions, we expect the EBITDA margin to fall due to a changing business mix and a likely increase in pay-TV costs.

• Looking for associates to remain a drag. We expect a 15% YoY decline in the pre-tax earnings of associates. We think this will be driven by margin erosion at Telkomsel (Not listed) as a result of a rise in network expenses.

Valuation

• We maintain our 3 (Hold) rating and sum-of-the-parts-based six-month target price of S$3.09.

Catalysts and action

• A rejuvenated Optus is a bright spot, but we are concerned about the outlook for the company’s associates, which accounted for 48% of SingTel’s FY10 EPS. Based on our estimates, the core (Singapore and Optus) business is trading at a market-implied valuation of S$1.64/share. This is a 10% premium to our S$1.44 fair-value estimate, and is unattractive in our view.