Indian Connection Not As Strong

• Bharti Airtel, 31.9% owned Indian associate of Sing Tel, has reported its first quarterly drop in profit (-8.2%) in the March quarter , reflecting the bloody competition in the mobile market in India, where Bharti’s dominant market share actually declined in the quarter, to 22.6% from 24.6%.

• Unfortunately for Sing Tel, its share price performance has been increasingly tied to Bharti’s & its developments, eg

– the unsuccessful bid last year for MTN of South Africa;

– currently on-going acquisition of Zain Group‘s operations in Africa ex-Sudan and Morocco for US$10.2 bln; and

– the current intense bidding war for 3G licenses. (Citigroup thinks it could hit US$2 bln a piece.)

• We remain NEUTRAL on Singapore’s largest market cap stock.

• At $3.02, yield is 4.6%. This assumes 10% increase in the final dividend to be declared, to 7.6 cents, in line with the 10% higher interim dividend of 6.2 cents.

• Sing Tel will release result for ye Mar ’10 on before market opens on Thursday May 13th.

Bharti’s 4QFY10 within expectations

Bharti’s 4QFY10 results

Maintain UNDERPERFORM on SingTel on the back of Bharti’s 4QFY10 results, which were in line with consensus (on which our numbers are based). 4Q was marked by fairly strong revenue growth despite price competition while net profit fell as EBITDA margins were weakened by competition, weakness across all major divisions excluding the passive infrastructure division and higher SG&A, licence fees and access charges. Bharti has proposed a final dividend of Rs1/share. We retain our earnings forecasts, sum-of-the-parts target price of S$3.30 and UNDERPERFORM rating for SingTel pending its results release on 13 May. We remain concerned about the hefty price Bharti will be paying for Zain Africa which could dilute SingTel’s earnings by 0.5-4% for FY11-13, the ongoing 3G auction in India, higher content costs in Singapore and stiffer competition in Australia.

Topline was surprisingly strong. Despite prevailing price competition, Bharti’s topline grew 3% qoq to reverse two quarters of qoq declines. A 7% qoq rise in subscribers coupled with strong minutes growth, as elasticity kicked in, led to a 5% rise in MOUs. which managed to offset a 4% qoq drop in ARPUs. Intense price competition continued to take its toll on revenue per minute, which slipped 10% qoq.

EBITDA margins weakened again. Consolidated EBITDA margins (excluding one-off costs for acquiring Zain Africa and Warid Bangladesh) fell for the third consecutive quarter to 39% in 4Q from 40% in 3Q due to competition. All major divisions booked lower EBITDA margins save the passive infrastructure segment. Higher sales, general and administrative (SG&A) expenses, which rose 11% qoq (excluding one-off acquisition costs), licence fees (+6.6% qoq) and higher access charges (+3.6% qoq) also contributed. As a result, core profit fell 3% qoq and 19% yoy.

Leverage ratios. Bharti says it has the capacity to leverage up to a maximum of 3x net debt/EBITDA. It would work to quickly de-lever if it approaches these levels. Our back-of-the-envelope calculations suggest Bharti’s net debt/EBITDA could potentially rise to 2.6x if pan-Indian 3G bids hit US$3bn, including the Zain acquisition.

Capex. It noted that 3G would not increase overall capex as 3G spending replaces 2G capex. It would spend US$300m-350m on Infratel. Excluding Infratel, Bharti would spend US$1.5bn-1.8bn in India and US$2bn including its South Asian operations and on 3G capex in FY11.

Elasticity. The 13% rise in mobile minutes was spurred by higher elasticity, especially with customers at the lower end of the income spectrum as a significant portion of its subscribers migrated to lower-priced plans first launched in Oct 09. Bharti believes that elasticity would continue to rise.

That said, any growth in elasticity could be offset by further price competition (while probably near the tail end) as: 1) Videocon has just launched plans with rather aggressive pricing; 2) Etisalat has yet to launch; and 3) new greenfield operators are expanding their rollout.

Consolidation and spectrum fees. Bharti will not participate in any consolidation in India as new operators have little to offer other than spectrum. However, it does see the industry consolidating as there are too many players and it believes that the market could ultimately support 5-6 operators.

Announced another dividend. Following a maiden dividend announced in 4Q09, Bharti has proposed a final dividend of Rs1/share for 4Q10. We were somewhat surprised. Although Bharti was FCF-positive in FY10, had turned net cash in 4Q10, and the amount declared is small, we nevertheless thought that it would need to preserve cash as the 3G auction has scaled up to dizzying heights, reaching close to US$2bn. Also, Bharti would need cash for its acquisition of Zain Africa, where it will be assuming US$10.7bn worth of debt.

Zain Africa deal closure soon. Bharti expects to conclude the deal in mid-May and would reveal more then. The process is said to be going rather well as approvals are streaming in and it is confident of securing all the necessary approvals.

Valuation and recommendation

Maintain earnings forecasts, target price and UNDERPERFORM. We make no changes to our forecasts, sum-of-the-parts target price of S$3.30 and UNDERPERFORM rating on SingTel pending its results announcement on 13 May. We believe Bharti paid a hefty premium to acquire Zain Africa, which would dilute SingTel’s FY11-13 earnings by 0.5-4%. Potential de-rating catalysts are the ongoing 3G auction in India which has reached dizzying levels and shows little signs of slowing down, higher content costs in Singapore and stiffer competition in Australia where Vodafone Hutch Australia (VHA) is looking to unseat Optus as the second largest operator.

Profit fall puts pressure on Bharti to wrap up Zain deal

Bharti Airtel’s first profit fall in three years puts more pressure on India’s top mobile operator to quickly integrate its US$9 billion purchase of Kuwaiti Zain’s African assets to cope in a cut-throat market.

Bharti, 32 per cent owned by Singapore Telecommunications, has been caught in a margin-destroying price war with Reliance Communications and other rivals in the world’s fastest-growing and arguably the most competitive market.

In a sector that is signing up 16 million wireless users on average each month and counts overseas players such as Vodafone, NTT DoCoMo and Telenor, call rates have pummelled to as low as 0.7 US cents per minute.

‘The humungous competitive activity to increase market share is only going to increase in the near future before it leads to consolidation in the sector,’ said Rakesh Rawal, head of private wealth management at Anand Rathi Financial Services. ‘Bharti is a long-term play and it remains to be seen how it will use its overseas presence to boost earnings growth.’

Last year, Reliance Comm and Bharti were the only two stocks to fall in the 30-share Bombay Stock Exchange index, which rose 81 per cent. So far this year, Bharti is down 9 per cent and Reliance Comm has lost 2 per cent in a steady market. Bharti posted a worse-than-expected 8 per cent drop in January- March profit, its first fall in profit since it began reporting under US GAAP in 2006-2007.

Sanjay Kapoor, chief executive of Bharti’s South Asian operations, said: ‘The propensity (for call charges) to drop any further on financially sound grounds is not there.’

In March, Bharti struck a US$9 billion deal to buy telecoms operations in 15 African countries from Zain, and expects to become the world’s No 5 mobile firm.

The deal by Bharti, which dominates India’s mobile market with about 128 million subscribers in the country’s 580 million users, comes after two failed attempts to finalise tie-ups with South Africa’s MTN.

Chairman Sunil Mittal said in a statement Bharti was working towards a closure of the Zain transaction at the earliest but the company had not set a time frame.

The Zain deal must be approved by regulators and governments in at least two of the African markets have weighed in against the deal. There is also a dispute about minority ownership of Zain’s operations in Nigeria.

Bharti’s net profit fell 8 per cent to 20.55 billion rupees (S$633 million) under the US accounting standards in its fiscal fourth quarter.

Revenue rose 2 per cent to 100.56 billion rupees. A Reuters poll of 12 brokerages had forecast a net profit of 20.78 billion rupees on revenue of 98.15 billion rupees.

Average revenue per user fell 28 per cent to 220 rupees as more than half of the new users were from rural areas, where the average talktime is lower than their urban counterparts.

Adds 45k Pay TV subscribers

Adds 45k Pay TV subs. SingTel has added another 45k Pay TV subscribers over the last four months, growing its mio TV base from 155k to 200k, an increase of 29%. As a recap, SingTel now holds the exclusive broadcast rights for the widelyfollowed Barclays Premier League (BPL) 2010-2012 seasons; SingTel has scored another coup over StarHub by securing the exclusive broadcast rights to a suite of sports networks and services from ESPN STAR Sports (ESS) from mid-2010. As the deals were secured before the recent Pay TV revamp in Mar, these will only be transmitted via SingTel’s mio TV setup.

Little impact on FY10 numbers. Despite the sharp jump in new Pay TV adds, we do not expect them to have any impact on FY10 numbers. We believe that the bulk of its new subscribers may be paying nothing until the actual broadcast of the BPL in Aug 2010; the ongoing promotion for its mio TV also offers the free broadcast of the 2010 Champions League and Europa League matches. For home subscribers, SingTel is charging a monthly subscription of S$23 (before GST) for BPL and for S$2 more, they can get additional ESS channels. We understand that commercial subscribers will need to pay around S$598 (before GST) per month. As such, we are likely to see the full impact of its increased Pay TV subscriber base in its 3QFY11 results (ending Dec 2010).

4QFY10 results likely to be upbeat. Having said that, we still expect its 4QFY10 results – likely due out by mid-May – to be fairly upbeat as per its guidance for FY10; SingTel had earlier guided for its Singapore operational EBITDA to grow at low single-digit level and for its Australia operating revenue and EBITDA to grow at low single-digit levels; SingTel expects both Bharti and Telkomsel (its two largest contributors) earnings to grow in local terms, although it notes that ordinary dividend will be lower. For 4QFY10, we expect net profit to come in around S$673.2m on revenue of around S$3391.3m; for FY10, we estimate that SingTel will post revenue of S$15791.6m and net profit of S$3565.3m.

Maintain BUY. With its FY10 results due soon, we hold off revising our FY11 estimates; but we remain upbeat about its prospects on the back of a likely faster-than-expected recovery in its associate earnings and opportunities presented by the NBN. As such, we maintain our BUY rating and S$3.51 fair value.

SingTel’s pay-TV subscriber base hits 200,000

SINGAPORE Telecom has scored another 45,000 pay-television customers in the past four months as the lure of premiership football continues to draw viewers to its camp.

SingTel said yesterday that its mio TV subscriber base has grown to 200,000 – 29 per cent up from 155,000 customers at the end of last year.

This is the fastest pace of growth since SingTel introduced its Internet-based mio TV service in July 2007. It also suggests that SingTel’s bold bid for Barclays Premier League (BPL) broadcast rights could be game-changing in the pay-TV stakes.

Despite SingTel’s recent gain, rival StarHub still has a comfortable lead with more than 500,000 cable TV subscribers.

SingTel outbid StarHub to score the exclusive right to broadcast the 2010 to 2013 seasons of the BPL. The win sparked a public outcry over having to pay for two pay-TV subscriptions as well as the hassle of having two incompatible set top boxes.

SingTel’s generous BPL bid also reportedly raised Fifa’s price expectations for the upcoming World Cup broadcast rights and contributed to the current impasse.

SingTel and StarHub are still trying to score an injury-time goal to screen the coveted tournament here.