SingTel posts highest subscriber gain

Exclusive handset deals and aggressive mobile promotions continue to make more consumers ‘see red’, with Singapore Telecom chalking up the biggest subscriber gain among the three local operators in the first quarter of this year.

The country’s largest telco said yesterday that it added 34,000 new mobile customers in Q1, to take its Singapore cellular base to 2.98 million.

In contrast, rival StarHub gained 16,000 new mobile subscribers in Q1, while MobileOne lost 11,000 customers.

With the Q1 addition, SingTel has increased its market share three percentage points from last year to 46.4 per cent.

The company’s winning streak was fuelled partly by its exclusive tie-up for coveted handsets such as Apple’s iPhone 3G. And in February this year it got first bite at Singapore’s first ‘Google phone’, a touch-screen handset from Taiwanese maker HTC.

SingTel’s gains, however, could not mask the underlying trend that the island’s mobile market is finally cooling off after years of sizzling growth.

Statistics from the Infocomm Development Authority of Singapore show the cellular penetration rate grew a mere 1.3 per cent to 132.6 per cent in Q109. In the same period last year, the growth was twice as high at 3.5 per cent.

Amid the deep recession, even defensive plays such as telcos are feeling the pinch, with StarHub citing lower voice usage and international calls as key reasons for a drop in its mobile earnings last week.

On a regional level, SingTel, which reports its full-year results today, grew its mobile base by 17 million sequentially to end-Q1 with a combined customer base of 249 million. Its Australian unit Optus contributed 156,000 new subscribers to the overall tally.

Among its six regional associates, India’s Bharti recorded the biggest increase, growing its subscriber count 9.7 per cent or 9.3 million from the previous quarter to 93.9 million.

In Indonesia, Telkomsel added 6.8 million subscribers during the quarter.

SingTel’s Thai and Philippine associates – AIS and Globe – increased their subscriber bases by 112,000 and 1.04 million during the quarter, while Warid and PBTL reported quarterly gains of 462,000 and 64,000 respectively in Pakistan and Bangladesh.

SingTel to hive off bulk of Internet assets by 2014

Telco could reap huge returns from divestment over next five years

Singapore Telecommunications has been given the deadline of April 2014 to divest more than 75 per cent of its local Internet assets – a move which could yield substantial returns for the operator over the next five years.

The telco is required to hive off its so-called passive broadband infrastructure such as underground ducts and manholes to a neutral party called the AssetCo (Asset Company) under OpenNet’s winning proposal for building the Republic’s new fibre-optic cyber highway.

OpenNet, in which SingTel has a 30 per cent stake, received the official nod from the Infocomm Development Authority of Singapore (IDA) for its construction plan earlier this week.

‘The AssetCo, as proposed by OpenNet in its NetCo Request-for-Proposal submission, will own and control the relevant underlying passive infrastructure assets that are used to support OpenNet’s deployment. These underlying assets, which include central offices, ducts and manholes, will be transferred from SingTel to AssetCo,’ IDA said in a statement.

By reusing SingTel’s existing investments, OpenNet promises to complete the job of wiring up Singapore two years ahead of IDA’s initial schedule. This time advantage was widely viewed as one of the key factors behind OpenNet’s victory over the Infinity Consortium, a group fronted by rival telcos StarHub and MobileOne.

Besides expediting deployment, the IDA said this arrangement will ensure there is ‘minimal disruption when civil works begin later this year’ as activities such as underground excavation will be cut down during network rollout.

Under the regulator’s new mandate to curb unfair competition by splitting up broadband infrastructure owners and service providers, SingTel will need to reduce its stake in the AssetCo to less than 25 per cent within 60 months from April 2009, IDA revealed.

According to industry estimates – which could not be confirmed – SingTel’s existing Internet assets could be worth nearly $2.8 billion. By divesting more than 75 per cent of these to the AssetCo, SingTel could stand to receive substantial compensation over the next half a decade. Industry sources estimated that this could easily amount to more than $1 billion.

With IDA’s new broadband regulations, players such as SingTel can no longer have complete ownership of broadband pipes and provide Internet services at the same time. Instead, they will need to lease bandwidth from an intermediary called the Operating Company (OpCo) if they wish to provide broadband services to consumers and businesses.

A new StarHub subsidiary called Nucleus Connect clinched the government tender to be Singapore’s first OpCo last month. This contract, which comes with a $250 million subsidy, was officially signed on Monday evening.

If SingTel decides against buying bandwidth from its rival, the firm has the option of setting up another OpCo as the StarHub deal is non-exclusive.

However, SingTel will not be entitled to any government funding if it proceeds with its own OpCo venture.

Regional boost expected in 4Q09 results

Further recovery expected in 4QFY09

SingTel is scheduled to announce its 4QFY09 results on 14 May 09. We expect its core net profit to decline 13-14% yoy to S$3.35bn-3.38bn, a little ahead of our existing forecast of S$3.32bn. We estimate a core net profit of S$850m-880m, up 1-5% qoq but down 9-12% yoy, for 4QFY09. This should take SingTel on a path of earnings recovery since results bottomed out in 2QFY09. Key characteristics are expected to be:

Economic weakness to be felt in Singapore. We expect SingTel Singapore’s revenue and PBT to be flat qoq, with weaknesses from mobile roaming and small/medium enterprises offset by robust wired and wireless broadband take-up. SingTel is likely to have gained mobile revenue market share from MobileOne, whose revenue fell 4% qoq.

Seasonal weakness in Australia. Optus’s revenue should decline 2-3% qoq, consistent with previous seasonal weakness. However, margins should improve as the impact of iPhone subsidies should have been largely felt in the previous two quarters.

Bharti may weaken, but Telkomsel should strengthen further. We expect Bharti’s profitability to come under pressure during the quarter. Reliance ratcheted up the competitive heat in India with the aggressive launch of its GSM network nationwide in Jan 09. Reliance threw in free minutes although call rates have remained on par with its competitors’.

However, the reverse is happening in Indonesia where competition is easing for Telkomsel, indicated by industry tariffs creeping back up. Average on-network and offnetwork rates rose 9% and 3% respectively between Nov 08 and Mar 09. All in, we expect Telkomsel’s core net profit to improve qoq.

Stronger regional currencies. A key momentum behind SingTel’s stronger core net profit qoq is the stronger currencies of its associates. Figure 2 shows the relevant currencies for SingTel gaining by 1-5% qoq. This was a small reversal from the sharp declines in 3QFY09.

6.9ct final dividend. We expect SingTel to maintain its absolute payouts by raising its payout ratio from 50% in FY08 to about 60% in FY09. We expect a final DPS of 6.9cts to bring the total to 12.5 cts for the year. Although FY09 core net profit is expected to be lower than FY08’s, we expect SingTel to retain its absolute DPS of 12.5cts.

Mirroring 1HFY08, SingTel paid out 5.6cts/share in 1HFY09, suggesting that payouts would be maintained. Optus’s failure to clinch the Australian NBN mandate has relieved the group of any substantial increase in capex. Our DPS estimates are backed by SingTel’s free cash flow/share of 15.4cts, 16.4cts and 19.1cts estimated for FY09-11.

Valuation and recommendation

Maintain OUTPERFORM and sum-of-the-parts target price of S$3.05. Key rerating catalysts could include qoq improvements in core net profits at its key units, strengthening regional currencies and further signs of an easing price war in India. SingTel is our top telco pick in Singapore for its exposure to high-growth telcos followed by M1 for its attractive dividend yields.

Near-term cheer for SingTel shareholders

IN the cut-throat business world, companies often find joy in their rivals’ mishaps. In the case of Singapore Telecommunications, however, it could be well be the company’s shareholders that end up cheering the failure of the group’s recent broadband bids.

The absence of a major foreign acquisition, coupled with SingTel’s failure to capture recent broadband tenders in Singapore and Australia, means that the firm is now freed from major capital commitments. In all likelihood, this could set investors up for a higher cash payout when SingTel releases its results for the financial year ended March 31, 2009 next month.

The company had previously stated that its dividend payout ratio for the year would be 45-60 per cent of underlying earnings. With concerns of major capital expenditure allayed, shareholders should find themselves at the higher end of this reward spectrum.

In 2008, SingTel put a halt to its payment of special dividends, a move that prompted market talk that it was conserving cash to support the bid for South Africa’s MTN Group by its Indian associate Bharti.

The demise of the deal a few months later meant SingTel drew a blank on the foreign acquisitions front in 2008. Its local purchase of Singapore Computer Systems aside, the war chest that has been set aside for funding its overseas ambitions has remained largely untapped.

Apart from the MTN bid, SingTel’s involvement in broadband projects in Singapore and Australia were also seen as other likely burdens on the firm’s capital resources.

Top on this list was SingTel’s attempt to land the NetCo (Network Company) and OpCo (Operating Company) bids in Singapore, two separate contracts covering the building of the nation’s new fibre-optic network and the wholesaling of bandwidth on the new broadband pipes.

In particular, there was much uncertainty over the degree of financial drain from the NetCo project, an undertaking which was projected to cost nearly $3 billion.

SingTel won this bid last September as part of a four-member consortium called OpenNet. But instead of having to make a substantial cash outlay, SingTel is to be compensated $1 billion over the coming years for surrendering its Internet assets to OpenNet to speed up network rollout.

The operator then went solo in the OpCo bid but it lost out to rival StarHub, which snagged the deal for operating Singapore’s new high-speed broadband network earlier this month. For SingTel, the loss meant that additional spending on OpCo-related equipment has also been averted.

Beyond local shores, SingTel’s Australian unit Optus was involved in a similar bid to build and operate a high-speed National Broadband Network (NBN) Down Under.

Due to Australia’s large land mass, the project was expected to cost over A$40 billion (S$43.3 billion) and it prompted speculation that SingTel may have to increase borrowings or slash dividends should Optus land the contract. Both worries have been dispelled with the Australian government turning down all four bids this month on the grounds that they were not up to par.

Instead, the authorities will take on the job of wiring up Australia themselves, a move described by some analysts as the ‘best-case scenario’ for SingTel. This is because it is now freed from the capex commitment but Optus can still benefit under the country’s more open broadband regime. As a result, some market watchers now expect SingTel to exceed its stated dividend payout ratio.

Since the onset of the recession, SingTel has consistently been hailed as one of the storm shelters for panic-stricken investors. With no major investments on the cards and the additional breathing space created by the recent upswing in regional currencies, there is no better time to show investors that they have made the right call by playing it safe.