SingTel more expensive than Bharti?

Story: We expect SingTel to report underlying net profit of S$835m (down 10% y-o-y, up 4% q-o-q) on 10th of February, which could be slightly lower than consensus estimates. In our view, tax savings rather than associate growth would drive the sequential growth. In 2Q09, SingTel paid $33m in tax on dividends from associates but in 3Q09F there are no dividends to be recognized from associates.

Point: We want to highlight three key points about SingTel.

Lower sequential contribution from associates. Weaker Indian rupee (down 3% q-o-q) and Indonesian rupiah (down 10% qo- q) are expected to impact earnings contributions from Bharti and Telkomsel. We do not expect Telkomsel’s contribution to recover yet as it benefited from S$22m oneoff tax adjustments in 2Q09, which would be absent in 3Q09F.

Higher sequential contribution from Singapore and Australia. 3Q09F would benefit from lower iPhone subsidy compared to 2Q09. However, Optus contribution would be impacted by weak Aussie dollar (down 20% q-o-q).

SingTel trading at premium to Bharti is unsustainable. Currently SingTel trades at 13.1x PER and 7.3x EV/EBITDA for FY10 compared to 12.5x PER and 7.0x EV/EBITDA for Bharti with 15% FY09-FY12 earnings CAGR. We believe either Bharti has to rise or SingTel has to decline for SingTel to look reasonable vis-à-vis Bharti, which is the only growth driver in SingTel’s portfolio. SingTel’s dividend yield of 4.5% is not compelling either. Regional telecom sector average under our coverage is 12.1x PER and 4.8x EV/EBITDA, implying SingTel is not cheap on valuation grounds.

Relevance: We fine-tuned our FY09 and FY10 estimates which are 3% and 6% below consensus estimates respectively. Maintain FULLY VALUED, with revised SOTP-based target price of S$2.52. Key risks are (i) Weak performance of Telkomsel, Warid and Globe as disposable income is impacted in their countries (ii) cut in corporate spending in Singapore where SingTel has majority market share (iii) Exchange rate risks (iv) Potentially higher capex in Australia, implying shortterm funding issues (v) lower growth for Bharti, if Rcom continues with aggressive pricing on GSM network.

SingTel pumps US$75m into Warid

Its shareholding in its Pakistani unit will remain at 30%

SINGAPORE Telecommunications (SingTel) has given Warid Telecom an additional capital injection of US$75 million to take its total investment in the Pakistani operator to US$833 million.

The latest capital boost came from the subscription to SingTel’s entitlement of 174.89 million Warid shares for US$75 million in cash.

Warid is expected to use this amount to fund the expansion of its domestic cellular network.

SingTel said the transaction will not have a material impact on its performance for the financial year ending March 31.

The operator bought its 30 per cent stake in Warid in 2007 for US$758 million as part of its strategy to branch into under-developed telecommunications markets around the world.

Warid is currently Pakistan’s third-largest mobile operator with a market share of around 18.8 per cent.

Despite its capital injection, SingTel’s shareholding in its Pakistani unit will stay at 30 per cent as Warid’s other shareholder, the Abu Dhabi Group, has also raised its stake significantly.

According to a Warid statement released on Wednesday, its two shareholders had recently pumped a total of US$250 million in equity into the firm.

Warid had suffered a wider-than-expected pre-tax loss of S$41 million for the three months ended Sept 30, 2008. Its underperformance, coupled with plunging regional currencies, dragged SingTel’s second-quarter net profit to a three-year quarterly low of S$868 million.

SingTel derives nearly 60 per cent of its earnings from overseas through wholly owned Australian operator Optus, along with regional associates Warid, Bharti Telecom, Telkomsel, Globe Telecom, Pacific Bangladesh Telecom and AIS.

While its foreign ventures have been the bane of its recent financial performance, some industry watchers believe the tide is finally turning in SingTel’s favour. The company’s share price has rallied as a result, rising 7 per cent in the past week to close at S$2.76 yesterday.

‘A collection of emerging market telcos, SingTel should benefit from a recovery in the currencies under which its key overseas units operate and receding aversion towards this asset class,’ CIMB said in a recent research note.

‘Also, the worst of competition in Indonesia appears to be behind Telkomsel. Bharti continues to gain market share,’ the research firm added.

SingTel will release its third-quarter results on Feb 10.

SingTel seen getting a lift from associates

SINGAPORE Telecommunications Ltd shares gained the most in almost two weeks on speculation that earnings at its units will grow this year even as economic growth in Asia falters.

SingTel, as South-east Asia’s biggest telecommunications company is known, added over 4 per cent, to close at $2.65 on Wednesday, the sharpest gain since Jan 16.

‘There is still some growth in regional telcos,’ Carey Wong, an analyst at Oversea-Chinese Banking Corp’s broking unit, said in a telephone interview. ‘SingTel’s associates are serving under-penetrated markets, giving them room for growth.’

SingTel is due to announce third-quarter earnings on Feb 10. Bharti Airtel Ltd, India’s largest mobile-phone operator that is 15.6 per cent owned by SingTel, last week said third-quarter profit climbed 26 per cent after the company added record subscribers and widened its lead over rivals.

Besides Bharti, SingTel owns stakes in mobile-phone operators in Thailand, Indonesia, the Philippines and Pakistan. It also fully owns Optus, Australia’s second largest telecommunications company.

Bharti’s 3QFY09 results

Bharti’s (SingTel’s 30.8% Indian associate) 9MFY09 results met our expectations but were ahead of consensus forecast. Core net profit of Rs68.9bn (+48% yoy) made up 74% of our full-year forecast but 82% of consensus. 3Q numbers were once again strong, characterised by: 1) admirable topline growth; 2) continued market-share gains; and 3) improving EBITDA margins.

Topline admirable. 3Q09 topline grew by 38% yoy and 7% qoq even in a highly competitive environment, led by remarkable subscriber growth of 55% yoy and 10% qoq. Bharti highlighted that its brand continued to hold sway and that the top-2 operators in India now command a larger revenue market share (in excess of 50%) in a 12-player market compared with a smaller revenue market share (of below 50%) when there were only 4-5 operators.

Market-share gains. As Bharti pushes deeper and wider into India, it is able to withstand the tide of competition, extending its market share to 24.7% (+0.1% pt qoq, +1.1% pts yoy). The Indian telco market is extremely resilient to economic challenges worldwide. Net adds have hit 10m per month, higher than the run rate of 9m subscribers per month only a few months ago.

Margins were firmer. EBITDA margins rose in 3Q09 to 41.0% from 37.7% in 2Q09 as 2Q was hit by a full quarter’s worth of increased carriage charges and higher diesel costs. Margins were helped by economies of scale on the back of the sheer volume of minutes carried on the network (1.4bn minutes per day), tighter cost control especially on non-network-related costs and greater productivity and operational efficiency.

3G services and WiMAX. At this stage, much of the timeline and process relating to 3G remains uncertain as the regulator irons out the timetable for auction given the tepid response from foreign operators, wrangling over the number of slots and fears that the government may not be able to fully maximise the revenue-generation potential from auctioning licences. Bharti has not disclosed its strategy for 3G for competitive reasons.

Sri Lanka launch. Bharti launched its service in Sri Lanka on 12 Jan using both 2G and 3.5G, becoming the fifth operator to do so. It sees potential in the market given that penetration rates are only at 50%. Sri Lanka has geographical and cultural proximity to India and Bharti can migrate its low-cost business model there. It has come up with a simplified and below-the-market tariff structure to gain an edge and response has been overwhelming. It believes that it will be able to match the coverage capacity of Dialog (which has 1,000 towers) in the next 6-8 months. It will be investing US$200m on capex over five years. That said, we see numerous challenges, including severe competition leading to margin compression, runaway inflation of 25% affecting mobile spending and escalating costs as well as lower elasticity of demand. Bharti would also have to unseat Dialog, the market leader with a 50% subscriber market share at end-3QCY08, which is rather tough given that it is coming from behind and starting as a greenfield operator.

Other updates. Towerco sustained its margins at 33.5% in 3Q (vs. 33.3% in 2Q) and benefited from lower diesel costs in 3Q. It will be transferring 35,000 towers from 1 Jan 09. It is looking to increase its tenancy ratios from the 1.34x in 3Q, up from 1.26x as at end-2Q. Apart from that, it has launched IPTV services, which have taken off rather well. Towerco deems this an integral part of any triple-play offering.

Valuation and recommendation

Unrivalled execution. While the market remains hyper-competitive, Bharti has been able to withstand the tide, executing well even as it extracts profits from first-time users in more rural areas in India. Subscriber momentum is unabated, led by its branding pull and it enjoys a huge competitive advantage from its economies of scale. We continue to view Bharti as one of the more reliable drivers of SingTel. We estimate that Bharti would constitute 24% to SingTel’s PBT.

Maintain OUTPERFORM, earnings forecasts and target price. Pending the release of SingTel’s 3QFY09 results on 10 Feb, we are maintaining our earnings forecasts and sum-of-the-parts target price of S$3.10. Bharti makes up about 37% of SingTel’s valuation. We reiterate OUTPERFORM on key re-rating catalysts of: 1) appreciating regional currencies; 2) further signs of easing competition in Singapore; 3) strong quarterly results, especially at key units; and 4) a bottoming out of earnings in 3QFY09.

Taking stock: FX, the Sing/Au valuation & the NAV discount

FX trends will hurt 3Q09 results but Buy for increasing defensiveness
The S$ appreciation against STel’s component currencies towards end-2008 will drag on the forthcoming 3Q09 results and may impact near-term sentiment. But a stronger S$ is already in our FY09e estimates and more importantly, DB expects S$ weakening from current levels against most of STel’s key currencies which will be beneficial. Furthermore, STel trades at a >10% NAV discount and with Sing / Australia at 11-12x fwd PE, we view STel as increasingly defensive. Maintain Buy.

Recent FX trends will hurt STel’s 3Q09 results but FX outlook improving
Toward end-08 the S$ appreciated significantly against the A$, Indian rupee and Indonesian rupiah which will impair the forthcoming 3Q09 results. For example, we estimate the 3Q09 translation rates would have reduced 2Q09 non-S$ contributions by approx -10%. But FY09e FX rates are trending in-line with DBe and importantly, we expect near-term S$ weakening against STel’s key currencies which will be beneficial for earnings and valuation. As such, although FX will again be in focus ahead of the 3Q09 results, the FX outlook may in fact be improving.

And STel still attractive given reduced core valuation and NAV discount
Furthermore, with Sing/Australia currently valued at 11-12x fwd PE (significantly de-rated from 2008 highs), future STel price downside appears increasingly limited – we highlight the strong inverse correlation between the SG/AU fwd PE and subsequent STel price action. In addition, STel still trades at an NAV discount which also limits downside from current levels. As such, we view STel as increasingly defensive (unlike for much of 2008) and recommend Buy.

Maintain Buy despite 3Q09 FX trends with S$3.27 target price
Our S$3.27 SOTP TP is based on S’pore S$0.88/share (DCF: 7.1% WACC, 0% g), Optus S$0.78/share (DCF: 9.6% WACC, 1% g), DB covered listed Assocs at TP, non-DB covered listed Assocs at market value and investment value for others. We have (very) slightly increased our TP to S$3.27 from S$3.23 to reflect changes to DB’s FX forecasts (some S$ weakening expected). Risks to our Buy rating include adverse FX trends, competition and an emerging market sell-off.