SingTel gains more handphone customers

Total of 3.2m – a 46% share of the market – cements its leading position

SINGTEL said its total handphone customers in Singapore grew to 3.2 million by end-December 2009, up 8.1 per cent from a year ago.

According to the company, it added 81,000 new customers in the quarter. This brings its total mobile customer base to 3.2 million, cementing its lead in the market.

SingTel’s estimated market share is 46.2 per cent based on the latest data from regulator Infocomm Development Authority of Singapore.

The telco reports its third quarter results today.

SingTel said its iPhone offerings helped drive strong demand and contributed to 36,000 new postpaid customers, up from 30,000 in the previous quarter. It also gained 45,000 prepaid customers with targeted acquisition promotions.

In the region, the group said on an aggregate basis, the combined mobile customer base rose to 285 million as at Dec 31, 2009, an increase of 23 per cent, or 52 million from a year ago.

Besides its wholly owned Australian Optus, SingTel also owns stakes in telcos in India, Indonesia, Thailand, Bangladesh, Pakistan and the Philippines.

SingTel’s largest associate Bharti added 8.4 million mobile customers for the quarter, up from 8.1 million a quarter ago. Its mobile customer base as at Dec 31, 2009, increased 39 per cent, or 33.2 million from a year ago, to 118.9 million.

Last November, SingTel announced plans to raise its stake in the Indian operator from 30.43 per cent to 31.95 per cent through the purchase of an additional 730,000 shares.

Its Indonesian associate Telkomsel grew its mobile customer base by 25 per cent, or 16.3 million from a year ago, to 81.6 million.

Optus said postpaid customers grew a record 164,000 during the quarter, to more than four million as at Dec 31, 2009.

During the quarter, Optus tightened its churn policy for customers who remained inactive after various recharge campaigns, and deactivated 272,000 prepaid customers. This resulted in a decline of 145,000 Optus prepaid customers for the quarter with total prepaid customers of 4.2 million as at Dec 31, 2009.

3QFY10 results preview

A stronger quarter

Bolstered by Telkomsel and A$; but maintain Underperform. We do not expect any surprises from SingTel’s 3QFY10 results, which are scheduled for release on 9 Feb. Core net profit should grow 1-4% qoq on higher contributions from Telkomsel and a stronger A$, despite seasonally higher subscriber acquisition costs (SAC) in Singapore and Australia, and weaker contributions from Bharti due to stiff competition in India. Core net profit should be 14-18% higher yoy because of a low base a year ago as regional currencies plunged. We maintain UNDERPERFORM on SingTel, with an intact sum-of-the-parts target price of S$3.30. We see de-rating catalysts from stiff competition and a likely heated auction for 3G spectrum in India, high content costs in Singapore and potentially rising competition in Australia.

The details

We expect SingTel’s 3QFY10 core net profit to be S$960m-990m, up 1-4% qoq and 14-18% yoy due to higher contributions from Telkomsel and a stronger A$. This is consistent with consensus expectations of S$970m. The qoq strength would defy seasonally higher subscriber acquisition costs in Singapore and Australia, and weaker contributions from Bharti. The strong yoy growth would reflect a low base due to a plunge in the A$ and rupiah. Results are scheduled for release on 9 Feb.

Seasonally higher SACs. We expect SingTel Singapore and Optus’s EBITDA margins to remain depressed by higher SACs from year-end festivities. M1’s 4Q09 EBITDA margins shed 3% pts qoq respectively. SingTel’s 2QFY10 margins were weighed down by subsidies for the iPhone 3GS. SingTel Singapore and Optus should contribute an estimated 29% and 22% respectively to group FY10 PBT.

Further weakness from Bharti; Telkomsel to improve. The performance of India’s largest cellco, which contributes about 20% to group PBT, was weighed down again by tough competition. Core net profit plunged 14% qoq and 13% yoy and will drag down SingTel’s overall results. The impact would be partially blunted by SingTel’s higher stake in Bharti during the quarter from 30.4% to 32%. However, we anticipate a stronger performance from Telkomsel on the back of easing competition in Indonesia and higher effective tariffs.

Currencies in SingTel’s favour. Regional currencies continued their march north, favouring SingTel. The A$ and rupiah strengthened 5% qoq and 2% respectively against the S$, while the Indian rupee weakened 2% during the quarter.

Issues to watch out for. During its results conference call, we will look forward to greater clarity on the impact of the cost of broadcasting the Barclays Premier League exclusively on SingTel, plans (if any) to launch its own OpCo under the Next Generation National Broadband Network (NGNBN), and its rumoured plans to list Optus. We will also be watching for further signs of competition in the residential and commercial broadband/data space ahead of the launch of NGNBN in Singapore.

Valuation and recommendation

We reiterate our UNDERPERFORM rating on SingTel, with an unchanged sum-of-theparts target price of S$3.30. We see de-rating catalysts from intense competition in India, higher content costs in Singapore and a likely escalation in competition in Australia. The delay in India’s 3G auction process from February to August-September is a short-term relief but remains an issue.

Optus and Telkomsel to boost 3QFY10 results

• SingTel will report 3QFY10 results on 9 February. We expect a hefty boost to earnings from effects of forex movements. Off a low base in 3QFY09 – when all its overseas contributions were hit by adverse movements in exchange rates – we expect SingTel to report strong YoY growth of at least 18% (i.e. S$940mil net profit) for 3QFY10.

• On the upside, strength of the Australian dollar (A$) and Indonesian Rupiah (IDR) against the Singapore dollar (S$) bodes well for contributions from wholly-owned Optus in Australia and 35%-owned Telkomsel in Indonesia. YoY, the A$ surged 27% and IDR appreciated 7%, on average for October-December 2009.

• In addition, contributions from Telkomsel will be on back of significant turnaround in earnings, as 3QFY09 was an extreme low point due to intense price wars, which has since abated.

• In 3QFY09, Telkomsel accounted for 13% of SingTel’s earnings, Optus contributed a fifth, while operations in Singapore made up 37%.

• On average, the S$ strengthened about 2%-3% YoY against the Indian Rupee (INR), Thai Baht (THB) and Philippine Pesos (PhP). Adverse impact will be felt most from Bharti’s contribution. In 3QFY09, Bharti accounted for a hefty 21% of SingTel’s earnings.

• Already, Bharti’s earnings growth has whittled to a mere 2% for 3QFY10 (reported 22 January) with competition heating up in India – a far cry from 20%-30% growth enjoyed in the past. A hike in SingTel’s holdings from 30.43% to 31.95% from November 2009 represents about 0.5% boost for 3QFY10.

• QoQ, we expect SingTel’s performance to be lacklustre over a high base in 2QFY10. Benefits from forex movements will be less felt as the A$ appreciated a moderate 6% QoQ with the IDR at a mere 2% – with marginal downside bias from INR, THB and PhP rates.

• SingTel’s third-tier telco associates – PBTL in Bangladesh and Warid Telecom in Pakistan – which are still in the red, will see losses dragged further by adverse forex movements. The S$ rose 7% and 12% against Bangladeshi Dhaka (BDT) and Pakistani Rupee (PKR) YoY, respectively. QoQ, S$ rose 3%-4% against these currencies.

• Maintain HOLD rating with fair value at S$3.05/share.

Cheapest telco in Singapore

• Trading at 11.6x PER, below 12.3x for MSCI Asia-Ex Japan telco services and cheaper than smaller peers StarHub and M1.
• Sharp recovery in Indonesia and stronger rupiah prompted 3%/6% upgrade of FY10F/11F earnings.
NCS is also making solid progress in Singapore.
• Upgrade to BUY with revised TP of S$3.50. Rumors of Optus re-listing, if true, could add 50 Scents to our TP.

Telkomsel should offset Bharti’s weakness. Telkomsel’s CEO Mr. Sarwoto Atmosutarno commented recently that Telkomsel’s subscriber base grew 26% y-o-y in 2009, and aims to grow that by another 14-15% in 2010. We raised our FY10F/11F (FYE March) earnings for Telkomsel by 12%/19%. We forecast SGD earnings growth of 30%/13% and 12%/-10% for Telkomsel and Bharti in FY10F/11F. Telkomsel earnings should offset potential S$85m drop to Bharti’s earnings contribution in FY11F, in our view.

Optus re-listing could add 50 Scents. The Wall Street Journal reported on 14 Jan that the sale of 25% stake in Optus is likely to raise A$4bn; SingTel declined to comment. If true, this could add 50 Scents to SingTel’s valuation. We estimate Optus’ market value at A$9b-11b, but SingTel might secure premium valuation for Optus, based on a higher dividend yield; similar to Maxis’ IPO. A much stronger AUD/SGD exchange rate of 1.25 is also favorable. In fact, SingTel could consider special dividends from Optus re-listing proceeds if it cannot find right acquisition targets, in our view.

Upgrade to BUY. SingTel is trading at 11.7x FY11F PER compared to StarHub’s 12.7x and M1’s 12.2x, despite a diversified business model and better growth prospects. Our earnings revision prompts higher SOTP valuation from Telkomsel (better outlook) and Optus (AUD/SGD) rate).