3Q FY2009 Results

3Q FY2009 Results. SingTel reported 3Q FY2009 operating revenue of S$3,701m (-3.2% yoy) and net profit of S$799m (-16.1% yoy). Revenue dropped as a result of the 23% decline of the Australian dollar against the Singapore dollar. This caused lower revenue contributions from Optus. Moreover, net profit fell by a larger percentage of 16.1 percent because the pre-tax profit contributions from the regional associates decreased by 24 percent to S$486m.

Despite the fall in profit, SingTel highlighted that it had a strong financial position and aimed to achieve cost efficiencies. For instance, it froze the hiring of employees. Although there were economic uncertainties, it was looking for acquisitions to grow its regional revenue contributions.

Performances. The Singapore operations recorded 21.0 percent increase in revenue due mainly to contributions from Singapore Computer Systems Ltd (SCS), which was acquired in 3Q FY2009. Even when SCS was excluded, revenue grew by 7.1 percent.

Similarly, Optus reported a 10.2 percent increase in revenue as it added 213,000 new mobile and wireless broadband customers in 3Q FY2009. The weaker performances of the associates were due to the depreciation of the regional currencies and poor performances by Telkomsel, Globe and Warid.

FY2009 Outlook. It expects the operating revenue for the Singapore and Australian businesses to grow at single-digit level. However, the regional mobile associates are likely to report lower pre-tax earnings. At the same time, it expects its earnings to be negatively affected by the depreciation of the Australian dollar and the regional currencies against the Singapore dollar.

Maintain BUY recommendation and target price reduced from S$3.86 to S$3.80. We have reduced the target price slightly from S$3.86 to S$3.80 as we have cut our estimated profit contributions from SingTel’s regional mobile associates. This is mainly due to expectations that Telkomsel and Globe will report lower profits due to greater competition in their markets.

However, we continue to rate SingTel as a BUY. It is the strongest player in Singapore, number two in Australia and has profit contributions from its regional mobile associates.

SingTel eyes acquisitions, higher stakes in partners

SINGTEL is on the lookout for acquisition opportunities and – as usual – is keen to raise its stakes in regional associates. ‘We are in a very strong financial position that will put us in a good position to look for acquisition opportunities,’ said group CEO Chua Sock Koong. ‘But clearly, we are not in a big rush to make acquisitions, given the global uncertainties.’

SingTel has always been keen to raise its stakes in regional associates, she added. But this is on a willing buyer-seller basis and terms that are acceptable to each side. ‘If an opportunity does arise, we will look at it seriously,’ Ms Chua said.

Also at SingTel’s third quarter results briefing yesterday, SingTel International CEO Lim Chuan Poh told reporters the group will not pick up cheap assets that have no strategic value and it remains focused on the Asia-Pacific region.

So far, not all of SingTel’s overseas ventures have borne fruit. Pakistan’s Warid and Bangladesh’s PBTL suffered bigger losses in the December quarter, due to to fair value losses. But SingTel said it remains committed to its investments in these operators and will try to improve their performance.

SingTel’s Q3 net profit slides 16% to $799m

It is feeling the impact of the global downturn; affirms FY09 guidance

by weaker regional currencies, Singapore Telecommunications posted a 16 per cent fall in net profit from a year ago to $799 million for the third quarter ended Dec 31, 2008.

It is starting to feel the pinch of the global downturn and affirmed its outlook for the fiscal year ending March 31, 2009 – that overall pre-tax earnings contributions of the regional mobile associates will be lower than the previous year.

Still, SingTel noted that Q3 was ‘one of its best quarterly performances’, with double-digit revenue growth in Singapore and Australia despite the difficult environment.

The group’s Q3 net profit – which took into consideration the group’s share of a $44 million exceptional loss on the non-cash impairment charge of a unit of Thai associate Advanced Info Service PCL – was also higher than the average $770 million forecast by four analysts polled by Reuters.

SingTel’s group operating revenue dipped 3.2 per cent to $3.7 billion, hurt by the Singapore dollar’s strength against the currencies of overseas markets in which its associates operate.

In particular, the Australian dollar suffered a steep 23 per cent decline against the Sing dollar from a year ago. Had the Aussie dollar remained stable, the group operational revenue could have grown 14 per cent, SingTel said.

Its group operational Ebitda (earnings before interest, taxes, depreciation, and amortisation) for Q3 fell 6.9 per cent to $1.06 billion while underlying net profit slipped 10.1 per cent to $838 million.

Operating revenue from its Singapore business grew 21 per cent to a record $1.51 billion in Q3, bolstered by first-time inclusion from newly acquired Singapore Computer Systems while fully owned Australian subsidiary Optus delivered a 10 per cent growth in operating revenue to A$2.2 billion (S$2.21 billion).

Pre-tax profit contributions from associates in Q3 fell 24 per cent to $486 million, hit by the depreciation in regional currencies.

‘The economic slowdown has started to impact the group,’ said group CEO Chua Sock Koong.

But she noted that SingTel is no novice in managing downturns. It is in a strong financial position to strengthen its market presence through customer-focused products and greater cost efficiencies.

It will soon be rolling out the Google phone known as HTC Dream in an exclusive tie-up, almost six months after its launch of Apple’s 3G iPhone, to target a different audience.

‘We will come up with significant differentiators when we launch the product,’ said Allen Lew, CEO Singapore.

Telkomsel will soon be launching the iPhone after winning the licence from Apple to distribute the handset in Indonesia.

As it will not be offering subsidies for the handsets unlike SingTel and Optus, there will not be an upfront margin erosion or earnings dilution, said Lim Chuan Poh, CEO SingTel International.

SingTel had incurred hefty upfront subsidy costs in its fiscal Q2 in a bid to boost take-up of the iPhone in Singapore by reducing the handset retail price.

With an eye on managing costs, Ms Chua said the group has reduced discretionary spending, sought to improve staff productivity, and undertaken offshoring of call centre services in Australia. Job cuts remain a last resort and the group would first decide to trim variable pay if necessary.

For the nine months ended Dec 31, the group’s operating revenue grew 2.5 per cent to $11.37 billion and net profit slipped 11.2 per cent to $2.55 billion. The group generated free cash flow of $2.27 billion and net debt gearing ratio as at Dec 31 was 25.5 per cent.

Yesterday, SingTel’s share price put on 2.1 per cent or five cents to $2.48.

Strong operational turnaround

• A little ahead of expectation. Annualised 9MFY09 core net profit was 1% above ours and 2% below consensus due to stronger-than-expected performance at SingTel Singapore and Optus. 3QFY09 core net profit rose 5% qoq but fell 10% yoy to S$838m, ahead of our expectation of S$760m-790m. Key takeaways:

• Strong operational turnaround. Revenues in local currency at both SingTel Singapore and Optus surged 13% qoq and 6% qoq respectively on the back of strong subscriber growth. The 19% qoq decline in the A$ resulted in a 14% qoq dilution in revenue in S$ terms for Optus. Group EBITDA margin rose 1.2%-pts after very weak margin in 2QFY09 when subscriber acquisition and retention costs (SARC) surged due to iPhone subsidies. We believe their aggressive subscriber acquisition efforts of previous quarters are bearing fruits with revenues kicking in.

• Associates weighed down by “fair value losses”. Associate contribution rose nudged 5% qoq due to: 1) the 10% and 5% qoq depreciation of the Indonesian rupiah and Indian rupee against the S$; and 2) fair value losses of S$28m by Telkomsel from foreign currency denominated vendor payables as a result of the weaker rupiah, and S$21m by Bharti on its US$ and Yen denominated borrowings.

• Guidance maintained. SingTel maintained its guidance, which we view positively as it signals no further deterioration in outlook.

• Neutral on industry consolidation in Australia. We are neutral on the consolidation of Vodafone and Hutchison Australia on Optus. While a larger and stronger operator will emerge, it removes an aggressive fourth player (Hutchison) which had been price-disruptive from the market.

• Maintain OUTPERFORM on SingTel with a SOP-based target price of S$3.10 on the operational improvement/turnaround in Singapore and Australia, stabilising regional currencies, strong qoq results among its key units, namely Telkomsel and Bharti.