Strong performance by Telkomsel

• In line. SingTel’s 1QFY10, when annualised is in line with both CIMB and consensus expectations, both at -0.1% variance respectively. The key features of the results are a strong rebound in margins from Singapore but offset by an equally weak margin from Australia, and strong growth from the associates.

• Strong margin in Singapore. SingTel Singapore’s revenue declined 5% qoq due to a seasonally weaker contribution from the lower-margin IT businesses. This also led to a 4.1% pt qoq rebound in margins. All in, Singapore appears to be trending in line with our forecast.

• High SAC in Australia. The reverse happened at Optus where it saw a 16.7% qoq surge in revenue driven by strong subscriber growth and a 10% qoq appreciation of the A$ vs the S$. A strong take-up of the iPhone led to higher subsidies, which resulted in a 5.9% pt decline in EBITDA margin to 21.3%, its lowest ever.

• Telkomsel was the star. Associate contribution surged 22% qoq, driven by: 1) a 50% qoq jump in Telkomsel’s contribution on the back of its operational strength and 7% qoq increase in the Rupiah, and 2) 21% increase in Bharti’s contribution. Losses from Warid and PBTL were also lower.

• Muted guidance for FY10. SingTel’s guidance was not surprising and very general. It expects Singapore revenue to groww at a single digit level with EBITDA margins at 36-38% vs 37% in FY09. FCF excluding dividends is expected to decline slightly. Similarly, Optus’s revenue and EBITDA are expected to grow at a low single digit level while FCF should be stable. The key drivers are the associates where Telkomsel and Bharti are expected to grow in local currency terms, but dividends from associates are expected to be lower. All in, it appears that FCF should be lower yoy.

• Maintaining recommendation and target price. We are reiterating our UNDERPERFORM recommendation with an unchanged SOP-based target price of S$3.20. We are likely to tweak our numbers upwards a little on the back of our recent upgrade of Telkom Indonesia/Telkomsel’s numbers.

A stronger 1QFY10 expected

Telkomsel and rupiah are key drivers

SingTel is scheduled to release its 1QFY10 results on 13 Aug. 1QFY10 core net profit is projected to rise 3-5% qoq and 14-18% yoy to S$985m-1,010m, the highest quarterly figure ever, buoyed by a small rebound in Singapore and Australia, the robust performances of Telkomsel and Bharti (although below our expectations) as well as regional currencies swinging back in favour of SingTel.

Some recovery in Singapore. SingTel’s Singapore’s revenue should expand 2-3% qoq, on the back of higher IDD and roaming revenue. Given SingTel’s large businessderived revenue, its revenue could outpace the performances of M1 and StarHub. We expect Optus’s revenue to rebound from a seasonally weak preceding quarter.

Telkomsel had a strong quarter. Inferring from Telkom’s results, Telkomsel’s core net profit should have jumped 30-40% qoq, on the back of strong revenue growth and higher EBITDA margins. Telkomsel added 5.4% more subscribers during the quarter while its ARPU was resilient. The momentum at Bharti fizzled out with an 8% qoq decline in core net profit on the back of flat revenue and a higher effective tax. Bharti appears to be facing headwinds from rising competition.

A$ and rupiah added punch. The Indonesian rupiah continued its northern march, appreciating against the S$ by an average of 7% qoq over the quarter. The A$ appreciated 2%.

Valuation and recommendation

Take profit. Despite the strong earnings expected, we maintain our UNDERPERFORM rating and sum-of-the-parts target price of S$3.20:

• More than its parts. SingTel is trading at a premium to its sum of its parts. We note that none of its listed associates has been re-rated very sharply, except Telkomsel (via Telkom).
• Newsflow turning negative. In addition to Bharti’s disappointing results, we believe newsflow from India could turn increasingly negative. For one, the cost of 3G spectrum could be surprise on the upside given its scarcity. While we are mildly positive on Bharti’s proposed merger with MTN, the market appears more cautious. We expect more newsflow on this in the coming weeks, which could be negative for SingTel’s share price.
• Rich valuations. The implied 12-month forward rolling P/E for SingTel Singapore and Optus has surged to 16x (Figure 3). This is derived from subtracting SingTel’s market capitalisation from the sum of all its listed associates, and dividing the residual value with the projected earnings for SingTel Singapore and Optus. Except for Telkomsel (through Telkom Indonesia), SingTel’s associates have not been rerated materially over the last few months, despite the strength in SingTel’s share price.

SingTel’s Optus launches 2b euro note programme

SINGAPORE Telecommunications yesterday said that wholly owned Optus Finance Pty has set up a two billion euro (S$4.1 billion) medium-term note programme.

Under the programme, which is guaranteed by SingTel Optus Pty and certain of its subsidiaries, the issuer may from time to time issue notes in series or tranches, in various amounts and tenors, and denominated in any currency agreed. They may bear fixed, floating or variable rates of interest or not at all. The notes will constitute unsecured obligations of Optus Finance.

The notes programme has been rated Aa3 by Moody’s Investors Service and A+ by Standard & Poor’s.

SingTel Optus, the Australian unit of the homegrown telco, recently clinched a A$186.5 million (S$223.4 million) contract from the Australian Taxation Office, its largest federal government deal from Down Under. SingTel Optus accounted for 29 per cent of the group’s earnings before interest, taxes, depreciation and amortisation (Ebitda) for the fourth quarter ended March. In the same quarter, the unit saw net profit rise 17 per cent to A$193 million. SingTel posted a 17.3 per cent drop in Q4 net income to $903 million. Full-year earnings fell 12.9 per cent to $3.45 billion, on a 0.6 per cent increase in revenue to $14.9 billion.

Defensive with growth potential

Targeting wider football audience. SingTel recently unveiled its pricing plans for the upcoming UEFA Champions League, Europa League and Serie A matches next season. Offered via three platforms – on mioTV, online and on mobile, the sign-ups will cost S$15.90/month for access to all three platforms for its subscribers; it also has separate plans for individual platforms should subscribers opt not to take up the all-in-one package. And it has not forgotten about non-subscribers – they can pay S$13/month to watch these matches online or just S$6 per live match. We think the multi-platform approach is great as it enables SingTel to tap the whole market of football fans – well beyond its current mioTV subscriber base of 100k.

Defensive earnings still matter. On the economic front, there are increasing signs that the global recession has probably past its worst point, but the consensus is that the pace of the economic recovery is still expected to remain splotchy. As such, there could still be several quarters of uncertain corporate earnings for most companies. On the other hand, SingTel’s suite of services is likely to remain quite resilient as consumers nowadays have deemed them to be near-essential or even a necessity. SingTel itself has guided for stable FY10 performance, with both Singapore and Australia turning in low single-digit revenue growth.

Growth potential from regional associates. Should there be a fasterthan- expected pick up in the economic recovery, we believe that emerging markets in Asia would be the ones who will benefit the most. We further believe that this would translate into faster growth for SingTel’s regional associates, effectively adding a “recovery angle” to its investment thesis. Another potential positive would be associate Bharti’s much-talked about merger with South Africa’s MTN; this would allow SingTel to extend its reach beyond Asia and with well-established partners. Other catalysts would include possible M&As in the region.

Raising fair value to S$3.49. On the recent leadership change at rival StarHub, we do not believe it will affect SingTel much – while it is the de facto leader in the Singapore market, its importance is likely softened by its potential regional expansion. In light of the firmer regional currencies, we have bumped up our FY10 and FY11 estimates slightly; the recent rebound in the global stock markets has also increased our SOTP fair value from S$3.18 to S$3.49. Coupled with an expected 3.9% dividend yield for this year, we maintain our BUY rating.