1Q FY2010 Results

1Q FY2010 Results. SingTel reported better than expected results for 1Q FY2010. Operating revenue was S$3,848m (+1.9% yoy) and net profit was S$945m (+7.7% yoy). In fact, its Singapore and Australian operations reported double-digit growth in revenue. However, group revenue rose only by 1.9% in Singapore dollars due to the depreciation of the Australian dollar. Moreover, the regional mobile associates, led by Bharti and Telkomsel, posted strong gains in total pre-tax profits of S$647m (+13.4% yoy) even though the Singapore dollar appreciated against most regional currencies.

Profit margin. Net profit margin decreased from 25.3% in 4Q FY2008 to 24.6% in 1Q FY2009. This was due to the increase in operating expenses mainly from the inclusion of Singapore Computer Systems (SCS) in its financial statements.

Merger between Bharti and MTN. Currently, Bharti and South Africa’s largest telecommunications company, MTN, are in discussions and the agreement extends up to 31 August 2009. During the briefing, SingTel has declined to disclose details about the transaction. Currently, SingTel has a 30.4% equity interest in Bharti. We believe that SingTel will try to increase its stake in Bharti to avoid any dilution in interests if the merger is successful.

Listing of NCS. SingTel has acquired SCS and include it as part of NCS. We believe that there is a possibility that SingTel may list NCS after it has reorganised the operations of NCS. This will enable SingTel to raise funds that may be used to increase its stakes in the regional mobile associates, for future acquisitions or distribution as dividends to shareholders.

FY2010F Outlook. The company expects the operating revenue for the Singapore and Australian businesses to grow at single-digit level and low single-digit level respectively. Moreover, among its regional mobile associates, Bharti and Telkomsel are likely to see growth in earnings. Nevertheless, the contributions from the regional mobile associates are likely to be affected by the depreciation in the regional currencies.

Maintain BUY recommendation and target price at S$3.80. We rate SingTel as buy and maintain the target price at S$3.80 because of its good financial performance. Furthermore, SingTel has highlighted that the worst is over and it is monitoring the recovery of its operations. In fact, we continue to like SingTel as it has established operations in Singapore and Australia as well as strong profit contributions from its regional mobile associates.

Positives priced in, but not the negatives

• A mixed bag. SingTel’s 1QFY10 results conference call revealed some positives – namely the strong growth in wireless broadband and iPhones, but also a negative – competition in Australia could pick up following the Vodafone and Hutchison merger.

• Strong wireless broadband and iPhone take-up. Wireless broadband penetration almost doubled among SingTel’s Singapore and Optus’s mobile users over the last 6 months. It still in a nascent stage and the strong growth should continue. Optus’s iPhone subscriber base surged 50% qoq despite being launched 1 year ago. Equally important is 53% of the activations were from users new to Optus and they generate ARPUs of 1.5-2x than that of regular postpaid users.

• Competition clouds looming in Australia? Vodafone-Hutch Australia (VHA) intends to displace Optus as the second largest player by Dec 2011, signalling a rise in competitive intensity. VHA commands a 26% subscriber market share vs Optus’s 33% at end 1H09.

• Upping forecast, lowering TP. We are raising our FY10-12 core net profit estimates by 0.8-2% on the back of our recent upgrade of Telkomsel’s numbers. However, we are cutting our SOP-based target price by S$0.10 to S$3.10 due mainly to revising downwards our valuation for Bharti, based on consensus numbers.

• Maintain UNDERPERFORM as we feel that SingTel’s positives have mostly been priced in and feel that any negative newsflow could cause the stock to de-rate. Our concerns are the rising competition in India and Australia, and the upcoming auction for the BPL broadcast rights for both SingTel and StarHub.

At a Glance

• Underlying net profit of S$945m was 3.5% below our expectations despite double digit y-o-y revenue growth in Singapore and Australia (in local currency terms)
• Optus EBITDA margins slipped 5 % points q-o-q in A$ terms due to higher iPhone activations/ recontracts but should recoup profits from higher ARPU in later quarters
• No change in estimates – maintain HOLD.

Comment on Results

Underlying net profit of S$945m (+10.3% yoy, -1.5% qoq) for 1Q10 was slightly below our expectations but largely in line with consensus. The key variance was lower-than-expected profits from Optus. In spite of a 4.5% sequential increase in revenue (A$ terms), Optus EBITDA declined 13.6% q-o-q to A$505m and net profit declined 28.1% q-o-q to A$139m. This was attributed to seasonality as well as higher customer acquisition costs associated with a q-o-q increase of approximately 50% in iPhone activations during the quarter.

The Singapore business was helped by contribution from SCS and fibre rollout revenue from OpenNet. EBITDA margins stayed stable at 41.8%, and operational EBITDA was up 10.6% to S$578m, in line with revenue. Associates’ contribution was in line, with underlying net profit contribution of S$497m up 14% y-o-y and 19% q-o-q. Strong earnings recovery at Telkomsel, coupled with fair value gains on currency at Telkomsel and Bharti – as highlighted in our results preview piece – were the key earnings drivers.

Recommendation

Management, while noting the challenging operating environment, reiterated its guidance at the beginning of the year – namely, single digit revenue and flat earnings growth in Singapore, single digit revenue and EBITDA growth for Optus and growth from regional associates Bharti and Telkomsel in local currency terms.

While Optus earnings were affected by customer acquisition costs in 1Q, we expect the company to recoup profits from higher iPhone ARPU (about 1.5x normal customer ARPU) in later quarters. Hence, we keep our EPS estimates intact and continue to maintain our HOLD call.

SingTel snaps losing streak, bodes well for economy

Q1 net income up 7.7%; 1st quarterly rise in 12 months

Singapore Telecom has added weight to hopes of economic recovery by posting a rise in quarterly profit for the first time in 12 months.

‘If you look at the economic numbers that have been announced, I think we are probably quite comfortable that the worst is over,’ said SingTel Group CEO Chua Sock Koong.

‘However, the question of how quick the recovery will be and how sustainable it is, is something we are closely monitoring,’ she told reporters at the company’s first-quarter earnings briefing yesterday.

Strong performances in Singapore and Australia, coupled with higher contributions from key regional associates Bharti and Telkomsel, lifted SingTel’s Q1 net income to $945 million, up 7.7 per cent from $878 million a year earlier.

Earnings per share rose 7.6 per cent to 5.94 cents, while operating revenue edged up 1.9 per cent to $3.85 billion for the three months ended June 30.

SingTel, which derives 72 per cent of its Ebitda – earnings before interest, tax, depreciation and amortisation – from overseas, is finally seeing regional currency movements swing in its favour after battling adverse fluctuations for a year.

The Indian rupee narrowed its depreciation against the Sing dollar sequentially to a mere 0.3 per cent in Q1, boosting earnings from Bharti, SingTel’s most profitable regional unit.

Bharti’s contribution to SingTel’s pre-tax earnings climbed 16 per cent to $272 million.

The Indian operator is looking to boost its earnings further through geographic expansion. It has extended merger talks with South Africa’s MTN Group to Aug 31.

A successful union will create a telecom titan with more than 200 million subscribers and over US$20 billion in annual revenue. It could also slash SingTel’s 30.4 per cent stake in its Indian associate to around 19 per cent, but market watchers expect the operator to top up its Bharti stake if this occurs.

‘Discussions are ongoing,’ Ms Chua said, declining further comment on its unit’s merger plan.

SingTel’s Indonesian associate Telkomsel also turned in a strong Q1, with the Indonesian rupiah climbing 7.1 per cent against the Sing dollar during the quarter. As a result, Telkomsel’s share of SingTel’s pre-tax profit rose 11 per cent to $245 million.

After factoring in the scorecards of its four other associates – Thailand’s AIS, Globe in the Philippines, Pakistan’s Warid Telecom and PBTL in Bangladesh – pre-tax profit from SingTel’s six regional units rose 12 per cent to $624 million in Q1.

The group’s Singapore operations registered a 0.3 per cent increase in net income in Q1 to $338 million on a 10.3 per cent improvement in sales to $1.38 billion.

Revenue increased across most key businesses except international telephony, as mobile roaming and IDD income were hit by the economic downturn.

Sales from local IT and engineering spiked almost 50 per cent due to a maiden contribution from SingTel’s latest local acquisition, Singapore Computer Systems.

The operator also netted Q1 revenue of $14 million in Singapore from a fibre-optic rollout contract with OpenNet, a SingTel-linked consortium tasked with building the new broadband highway.

‘We expect that (revenue from installing fibre) to increase as the pace of the rollout starts to peak between 2010 and 2011,’ said SingTel Singapore CEO Allen Lew.

The new nationwide fibre-optic network is expected to be fully operational by end-2012. Besides installing the new fibre-optic links, SingTel will pocket additional income over the coming years by divesting some of its Internet assets to OpenNet.

SingTel’s Australian subsidiary Optus saw a 13.4 per cent jump in net profit in Q1 to A$139 million (S$166.5 million), but its earnings fell 0.8 per cent when converted to Sing-dollar terms due to currency depreciation.

SingTel shares closed unchanged at $3.18 yesterday.

Affirms FY10 guidance

Good start to FY10. SingTel reported its 1HFY10 results this morning, which came in ahead of our expectations. Revenue grew 1.9% YoY and 7.9% QoQ to S$3847.7m, meeting 26.1% of our FY10 forecast, while net profit came in at S$945.4m, up 7.7% YoY and 4.6% QoQ, meeting nearly 27.3% of our full-year estimate. Operating EBITDA margin was stable at 29.3%, versus 30.3% in 1QFY09 and 32.2% in 4QFY09.

Singapore operations did well again. Its Singapore business delivered a relatively strong quarter, with operating revenue up 10.3% YoY; main growth came from its IT and Engineering business, which jumped 50% YoY, which included the first-time rollout revenue (S$14m) from OpenNet and the recently-acquired SCS. Its mainstay Mobile business rose 3.6% YoY, driven by growth in data and mobile. Operational EBITDA margin was flat at 41.8% as improved margin at its telco business was diluted by increased revenue contribution from its IT and Engineering business. Going forward, SingTel continues to expect Singapore’s operating revenue to grow at single-digit level; EBITDA margin to remain stable around 36-38%; capex below S$800m; free cashflow to decline slightly.

Australia saw EBITDA margin squeeze. SingTel’s Australia business saw a 12.4% YoY rise in operating revenue, aided by strong mobile revenue growth (+20.6%) as the popularity of the Apple iPhone continued through the quarter. However, due to the iPhone promotions/recontracts, Mobile EBITDA margins slipped by 5ppt to 25%; but management see it as a near-term trade-off to get more higher-value customers. We note that on the corporate side, Optus has also won several big contracts and we expect them to continue to gain traction in this area. For the rest of FY10, SingTel expects Australia’s operating revenue and EBITDA to grow at low singledigit levels; capex around A$1.1b; free cashflow to be stable.

Maintain BUY and S$3.51 fair value. For its associates, 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. Nevertheless, we continue to expect SingTel to pay out between 45% and 60% of its recurring earnings as dividend this year. While we are keeping our FY10 estimates unchanged, our SOTP fair value rises from S$3.49 to S$3.51 to reflect the higher equity value of its regional associates. Maintain BUY.