Why SingTel isn’t bidding, ask analysts

SINGAPORE Telecommunications should explain to shareholders why the company allowed associate Bharti Airtel to bid for Zain’s African wireless assets, instead of offering to buy the businesses directly, analysts at Deutsche Bank said.

‘This is one of the few African portfolios potentially available, and it is not clear how SingTel’s shareholders benefit from indirect exposure to Africa,’ the Deutsche Bank analysts including Hong Kong-based William Bratton wrote in a report on Wednesday. ‘We are increasingly puzzled by SingTel’s international strategy.’

Bharti Airtel, in which SingTel owns almost a one-third stake, this week offered US$9 billion to buy most of Kuwait-based Zain’s African assets. The Singapore company was supporting the deal, the Times of India reported yesterday, citing Bharti chairman Sunil Mittal.

‘SingTel continues to explore investment opportunities in the Asia Pacific region and emerging adjacent markets,’ Singapore Telecommunications told Bloomberg News yesterday. ‘We can do so directly or, should the synergies be stronger with our associates, we will work with them.’

SingTel shares gained four cents to close at $3.04 in Singapore trading yesterday.

Bharti, South Asia’s biggest mobile-phone company, contributed fourth-quarter profit of $235 million to Singapore Telecommunications, the shareholder said in its earnings report this month.

The New Delhi-based carrier last month said it had 120.2 million subscribers as of Dec 31, an increase of 40 per cent from a year earlier. — Bloomberg

Bharti’s offer for Zain Africa a drag

• SingTel’s 32%-owned associate Bharti Airtel of India has entered into exclusive negotiations (until 25 March) to buy Zain Africa BV (ZA) from Kuwait-based Zain Telecom (ZT). Board of ZT has accepted Bharti’s offer, which will leave ZT with remaining interests in seven markets in the Middle East, and Sudan and Morocco.

• ZA comprises mobile operations in 15 African countries – Burkina Faso, Chad, Congo Brazzaville, Democratic Republic of Congo, Gabon, Ghana, Kenya, Madagascar, Malawi, Niger, Nigeria, Sierra Leone, Tanzania, Uganda and Zambia. Aggregate subcribers of 42 million (at September 2009) would represent a 35% expansion of Bharti’s subscribers base.

 • Bharti’s offer at Enterprise Value of US$10.7bil comprises net debt of US$1.7bil. Bharti will pay US$8.3bil upon close of deal, and the rest a year on. With net debt-to-EBITDA at 0.1x, Bharti can gear up; additionally, rumours are abound of a US$5bil rights issue.

• ZA reported revenues of US$2.7bil, EBITDA of US$870mil and net loss of US$112mil for 9-month-to-September 2009. On annualized EBITDA, this works out to EV/EBITDA of 9.2x. By comparison, this measure is 6.4x for Bharti and 7.5x for SingTel. 

• Deal is pending due diligence and regulatory approvals. These aside, a shareholding dispute at the Nigerian unit presents the larger hurdle. ZT holds 65.7% in Nigeria, while Econet Wireless owns the rest. Latter is currently pursuing arbitration proceedings against ZT on grounds that it had first rights of refusal, not complied to by previous owners when they sold the stake to ZT in early 2006. 

• Uncertainty over Nigerian operations is a major bugbear, as Nigeria is ZA’s largest asset. Nigeria with 15 million subscribers accounts for 36% of aggregate, and Nigeria also has the largest population of 156 million out of aggregate 469 million from the 15 countries. Nigeria’s GDP per capita of US$2,000 is third ranked among the 15, while mobile penetration of 45% still offers potential for growth. ARPU of US$7 is above the US$5 achieved by Bharti in India, while EBITDA margins are a high 34%. 

• On the other hand, Nigeria saw net loss of US$88.3mil for 9-mth-to-September 2009, representing 79% of ZA’s net loss. While ZA’s net loss is a sticking point, much of this is due to forex losses taken to ZT’s books. High depreciation charges are also a factor, as these operations are still in expansion mode. 

• ZA’s investment needs are high with capex to revenue averaging 31% for 9-mth-to-Septmebr 2009. Total capex of US$844mil for ZA, represents a 28% fall from year-ago period. Although capex for Nigeria at US$356mil, accounts a high 36% of revenues, this was a 27% YoY fall – and lack of support resulted in a 6% YoY fall in subscribers. Nigeria and Kenya (a smaller asset) were the only two operations, which saw a fall in subscribers. Subscriber YoY growth ranged from a healthy 17% to 51% for other operations. 

• While the deal presents new avenue of growth for Bharti – which is seeing a fast slowdown in its profit trend from rampant price wars in India – on the other hand the drag on bottomline from ZA mars upside prospects especially in the near to mid-term. 

• Some consensus downgrade has started on Bharti, however translated impact on SingTel is marginal at this point (Bharti accounts 18% of EBIT), and we are not revising our SingTel estimates at this stage. Maintain HOLD with fair value at S$3.05/share.

SingTel fully supportive of Zain deal: Bharti

Bharti reportedly in talks with banks; funding not an issue, says chairman

IT COULD be third time lucky for Singapore Telecommunications in its quest to expand beyond Asia as the company is reportedly putting its weight behind Bharti Airtel’s latest attempt at muscling into Africa.

SingTel’s Indian associate on Monday announced that it was in exclusive talks with Kuwait’s Zain group to buy over its mobile assets in the African continent.

The negotiations, which end on March 25, could result in a US$10.7 billion deal that would give Bharti access to some 42 million mobile subscribers across 15 African markets.

‘SingTel, as a partner of Bharti, is fully supporting us on the deal,’ Bharti chairman Sunil Mittal said in an Economic Times of India report.

When contacted, SingTel did not confirm its involvement in the Bharti-Zain deal.

‘As a strategic investor, we have significant governance and shareholder rights and we are actively involved in key decisions including major investments. We always seek to add value to our associates through both organic and inorganic means,’ a company spokesman said.

Singapore’s largest operator – which owns 32 per cent of Bharti – has repeatedly singled out Africa and the Middle East as the two continents that it would be keen to expand into.

It was presented with two such opportunities – to no avail – in 2008 and last year when Bharti engaged in merger talks with South Africa’s MTN Group. In September last year, the proposed US$24 million cash plus share swap deal between Bharti and MTN was again scuppered due to regulatory hurdles.

This time around, Bharti said in a statement that it is likely to pay Zain US$9 billion based on its estimated net debt of US$1.7 billion at the end of last year. US$700 million of the the payable amount will be paid a year after closing the deal.

Bharti is reportedly in talks with a few banks, including Standard Chartered and Barclays, on funding the purchase.

‘The financial plans will be laid out in totality over the coming days. All I can say is that funding has never been an issue and will never be an issue for Bharti,’ Mr Mittal was quoted as saying.

Weighed down by India

Post-results conference call

Maintain Underperform. We came away with our views unchanged on SingTel following its 3QFY10 results conference call. SingTel indicated that the commercial launch of NGNBN would likely be delayed to early 2H10 from April, but that it would continue to benefit as a contractor building the network. SingTel was non-committal on any potential capital management and we do not think it will happen at the end of

FY10. We raise our FY10-12 earnings estimates by 2-4% to account for a lower effective tax but maintain our sum-of-the-parts target price of S$3.30. SingTel remains an UNDERPERFORM as stiff competition and the auction for 3G spectrum in India coupled with prospects of intensifying competition in Australia loom over the stock. While its 3QFY10 performance was fairly strong, it was bolstered by a strong A$ which is now giving back some of its gains and a one-off tax credit in Singapore. We prefer M1 (Outperform, TP: S$ 2.07) for its potential capital management and benefits from NGNBN.

Group

Non-committal over capital management and Optus IPO. As usual, SingTel was vague about its capital-management plans despite a fall in its net debt/annualized EBITDA to below 0.9x and below its target of 1.5-2x. SingTel wants to have the financial flexibility to pursue growth and will review its cash levels if there are no imminent acquisitions. While its 3QFY10 net debt/annualised had drifted down to 0.85x and substantially below its target, we believe it is unlikely to declare anything substantial at end-FY10 because financial markets remain volatile, especially with concerns over sovereign debt defaults in Europe. SingTel had in the past returned 10-15 cts/share in dividends or capital when its net debt/annualised EBITDA fell to 0.8x. However, capital management at end-2010 is more likely as gearing continues to fall and financial markets normalise. SingTel was equally vague about its rumoured plans to list Optus and said it will consider anything that is value-accretive.

Still Asia-focused. SingTel reiterated that it remains focused on acquiring assets in the Asia Pacific and regions such as the Middle East and Africa. However, it added that it will be acquiring new capabilities to maximise the value of its existing assets. We believe this includes stimulating wireless broadband take-up and multimedia services among its emerging associates.

Singapore

Loss-leader strategy for mioTV. SingTel does not operate mioTV as a standalone business because mioTV is meant to help raise ARPUs for its broadband business and help SingTel make the transition from carriage provider to a multimedia service provider. We interpret this as SingTel positioning mioTV as a loss leader and will continue to be aggressive in acquiring content. This spells bad news for StarHub (Underperform, TP: S$2.14), in our view.

Likely delay in launch of NGNBN. SingTel indicated that commercial launch of NGNBN is likely to be delayed to early 2H10 from April, but the penalty for this will not be significant. No reasons were given for the delay and it expects the regulator to make an announcement on this.

Benefiting from rollout of NGNBN. With the rollout of the NGNBN in progress, SingTel is benefiting as a contractor via its IT units. While Open Net (the operating company) has not issued any capex guidance, SingTel indicated that Open Net’s capex should peak in 2010, which would be positive for SingTel. SingTel’s 3QFY10 IT and Engineering revenue jumped 13% qoq and contributed to a modest 7% of group revenue.

Australia

EBITDA guidance maintained. Optus reaffirmed its single-digit EBITDA guidance for FY10 despite its: 1) strong push for market share in mobile which would inevitably sacrifice margins; 2) 4Q09 strength; and 3) 9M10 yoy EBITDA growth of only 4%, as it expects 4QFY10 to be seasonally stronger.

Slowing on-net fixed broadband but strong wireless broadband. Optus’s on-net fixed broadband net adds had moderated to 8K in 3Q from the 25K-33K in the past few quarters because of competition and the somewhat substitutable but mainly complementary effects of wireless broadband. On the positive side, wireless broadband net adds were still healthy as Optus added 111K in 3Q vs. the 100K-104K net adds seen in past quarters.

Fixed-line strategy. Optus reiterated its three-pronged fixed-line strategy: 1) focus on its on-net business where it is upgrading its HFC network in Melbourne and Brisbane; 2) concentrate on driving costs down; and 3) preparing for NBN. Efforts have paid off with its business and wholesale EBITDA margins raised from the high teens to the mid-20s in 3QFY10, and EBITDA margins rising to 15% in consumer and SMB from 13% a year ago. It has also captured a 20% market share in areas where it has network coverage.

Of spectrum, LTE and NBN. The recent acquisition of 10 MHz of paired spectrum in 2100 MHz in eight capital cities would help to improve the quality and capacity of its network and help it cope with wireless broadband traffic. While it is running LTE trials currently, it does not see spectrum availability or the necessary devices and applications before 2012. Finally, on NBN, it is providing data and input for wholesale pricing and hopes for competitive access terms that would provide the best cost to taxpayers. It also hopes that any cash payment paid to the incumbent for use of passive infrastructure or copper assets would be made visible and transparent.

Valuation and recommendation

Raising forecasts on lower tax assumptions. We have raised our FY10-12 core net profit estimates by 2-4% to account for a lower-than-expected effective tax, especially in FY10. This is due to tax credits from a lower statutory tax rate in Singapore from 18% to 17% this year. We have assumed higher FY11-12 core net profit estimates after lowering our effective tax for its associates, based on YTD trends. However, our sum-of-the-parts target price of S$3.30 is unchanged as our earnings revisions are minor. SingTel remains an UNDERPERFORM as we believe intense competition in India coupled with prospects of a heated 3G spectrum is likely to weigh on stock sentiment. Also, competition in Australia could intensify with Vodafone Hutchison Australia looking to unseat Optus for the second spot. While its 3QFY10 performance was fairly strong, it was bolstered by a strong A$ which is now giving back some of its gains and a one-off tax credit in Singapore. Switch to M1 (Outperform, TP: S$ 2.07) for its potential capital management and benefits from NGNBN.

3Q10 Results

SingTel reported 3Q10 operating revenue of S$4,450m (+20.2% yoy) and net profit of S$991m (+24.0% yoy). We were impressed by its strong performance as revenue was 3.0% above our estimate of S$4,321m while net profit was 3.6% higher than our estimate of S$957m. SingTel’s Singapore operations posted revenue growth of 1.5% to S$1,530m. Its Australian unit, Optus, reported revenue increase of 4.8% to A$2,302m. In Singapore dollar terms, Optus revenue rose by 33.1% to S$2,920m due mainly to the appreciation of the Australian dollar. Furthermore, the share of regional associates’ earnings increased by 22.0% to S$592m due to the improvement in Telkomsel’s performance. 

Greater market share in Pay TV

SingTel has won the rights for Barclays Premier League (BPL) matches for three years from August 2010. It is offering subscription for BPL matches at an attractive price of S$23 per month excluding goods and services tax (GST). We expect about 90,000 football fans to switch from StarHub to SingTel. At the same time, SingTel is likely to introduce more programs on its mioTV to boost its customer base and grab market share from StarHub. 

Listing of Optus

There has been market speculation that SingTel may list Optus on the Australian stock exchange. We feel that it is likely to happen only if SingTel requires the funds for regional expansion such as acquiring a stake in a mobile telecommunications provider in an emerging country. Otherwise, SingTel has sufficient cash to maintain its operations. 

FY2010F Outlook

The company expects the operating revenue for the Singapore and Australian businesses to grow at low single-digit level. The earnings of Bharti and Telkomsel are also likely to improve in local currency terms. It anticipates the regional mobile associates to announce lower ordinary dividends. 

Maintain BUY recommendation and fair value at S$3.52

SingTel has reported better-than-expected results for 3Q10. It is also expected to benefit from the recovery of the global economy. We like SingTel for its growth prospects as its Singapore and Australian operations as well as regional mobile associates continue to post increases in revenue and profit. Therefore, we maintain our buy recommendation. Based on the discounted cash flow model, the fair value is S$3.52.