SingTel: No rights issue on the horizon

CEO says telco wants to maintain ‘a healthy debt-to- equity ratio’

ALTHOUGH rules for rights issues have been eased, Singapore Telecom’s local chief says the company will not be turning to shareholders any time soon to help expand its war chest.

‘Calling capital from shareholders is a last resort. While the credit markets are available, we will continue to get money from credit markets,’ said SingTel Singapore CEO Allen Lew.

SingTel has an A+ rating from Standard and Poor’s and an Aa2 rating – the third-highest on a scale of 10 – from Moody’s Investors Service.

With these strong ratings, loans may be SingTel’s preferred method for recapitalisation. But other local companies are increasingly tapping on shareholders for funding amid the tight credit market.

Last month, DBS Holdings unveiled a rights issue to raise $4 billion. And companies such as Saizen Reit, United Engineers and KSH Holdings have since taken the same route.

Earlier this week, the Singapore Exchange even rolled out new measures to cut the time needed for companies to complete rights issues.

But SingTel’s Mr Lew said: ‘We always want to retain a certain level of debt.’ SingTel wants to maintain ‘a healthy debt-to-equity ratio’, he told BT on the sidelines of the launch of SingTel’s new retail outlet at Jurong Point.

With the opening, the operator will say goodbye to the ‘Hello’ branding that has previously been associated with its retail presence.

Like the new outlet, the company’s 10 other Hello stores will take on the new ‘SingTel Shop’ name as they are refurbished over the next few years. The shops will also get a similar interior make-over to reflect SingTel’s new multimedia positioning, Mr Lew said.

For example, there are large touch-screen displays inside and outside the Jurong Point shop so customers can search for product information and even buy ringtones or music tracks after operating hours.

Traditional customer service counters have been replaced with a cafe-style set-up, where customers are waited on at individual tables by service staff.

‘This (revamp) will help us enhance the brand and help us cut through the clutter during this period,’ Mr Lew said.

SingTel would not say how much the retail overhaul is costing. ‘Our own generated cash flow can fund this,’ said Mr Lew. SingTel had $1.089 billion cash and cash equivalents as at Sept 30 last year.

Ringing loudly again

• Raised to Outperform from Neutral. We are upgrading SingTel to OUTPERFORM as the factors that led to a sharp de-rating of the stock – risk aversion to emerging market assets and their currencies and stiff competition in Singapore and Indonesia – are receding. Bharti continues to gain market share and is a key earnings driver for SingTel. SingTel’s high trading liquidity and exposure to regional Tier-1 cellcos make it a highly defensive stock to ride out the recessionary environment. However, M1 remains our top pick in Singapore for its very attractive dividends.

• Falling risks. SingTel should benefit from receding aversion towards emerging market assets and their currencies which peaked in Nov 08. Some 65% of its sumof- the-parts valuation and 57% of its FY10 PBT are attributable to its investments in emerging markets, while Optus in Australia contributes 15% to both. We believe that competitive heat in Singapore will peter out in the current recessionary environment as telcos strive to protect cash flows.

• Telkomsel turning around; Bharti gaining market share. Competition in Indonesia is easing as Excelcomino (XL) has largely exhausted its ability to undercut prices by surprise. Bharti is poised to entrench its dominance thanks to its expansion to rural areas.

• Maintaining forecasts; higher target price. We are maintaining our forecasts as regional currencies are broadly within our assumptions. We expect FY09 earnings to bottom out with a 16% contraction before growing by an estimated 8% in FY10. However, we raise our target price to S$3.10 from S$2.72, after removing our 10% discount for overseas assets earlier attached on account of currency volatilities.

Ten things to watch in 2009

2009 should be busy for STel; 10 key issues to focus on
We believe 2009 will be a busy year for STel as it is involved in the S’pore NBN NetCo build, bids for the Australian broadband network, competes for the S’pore EPL rights, deepens its Associate relationships and potentially uses reduced telco valuations to expand internationally. In this note, therefore, we detail the ten issues we will be watching in 2009. We maintain Buy for the TP upside and STel’s increasingly defensive nature (reduced Sing/Australia valuation & NAV discount).

2009 events in Australia & S’pore should focus on NBNs, costs & the EPL
Australia and S’pore 2009 themes are likely to be dominated by the national broadband projects. Information on both projects currently remains scarce and as more details are released throughout 2009, estimates and sentiment may be impacted. In addition, both operations will focus on cost control (watch headcount as the most visible indicator of this), while NCS expansion in S’pore is likely to significantly dilute margins. Finally, we expect STel to increase content acquisition and to bid aggressively for the English Premier League TV rights in 3Q09.

And internationally, in 2009 watch the Assoc relationships, PBTL and M&A
We will be watching the strength of STel’s existing Associate relationships in 2009, which we expect STel to deepen – this may involve a strengthening of the Bridge Alliance. In terms of STel’s portfolio, attempts will be made to re-invigorate PBTL through broadband wireless, while 2009 may be the year that the SingPost asset is finally disposed and the Taiwan interest exited. Finally, if STel is serious about international expansion, 2009 is likely to be active given recent valuation declines but as such, investors should not expect any accelerated returns.

Still attractive given TP upside, NAV discount and Sing/Au valuation; Buy
Our S$3.23 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. Given current valuations, the NAV discount and the reduced Sing/Australia fwd PE we recommend Buy. Risks to our view and Buy rating include adverse FX trends, increasing market competition and an emerging market sell-off.

Telstra out of NBN race

Telstra said this morning that it has been excluded by the Commonwealth from Australia’s national broadband network (NBN) request for proposal (RFP) because it did not include a plan on how to involve small and medium enterprises in the building of the NBN.

Comments

Increases Optus’s chances? This is a surprising twist of events, although it was questionable if Telstra’s 15-page proposal would be accepted as a bid. With Telstra out of the NBN race, Optus’s odds of winning may be elevated as it is now the largest bidder, both in terms of network and balance sheet.

Negative on Optus if it wins. We reiterate our view that we would be negative on Optus if it wins the bid as the economics of the NBN is questionable given the astronomical estimated cost of A$10bn-15bn to be spent over five years, the long gestation period for this service, the retail pricing (which is unlikely to be significantly below current levels) and litigation/delay tactics employed by Telstra if Optus were to win and seek access to Telstra’s exchanges and last mile access.

We are especially concerned about funding as Optus is likely to shoulder the burden alone as its other consortium members lack the balance-sheet strength for a meaningful equity infusion. There has been talk that SingTel would contribute A$1bn- 2bn in equity for the project and an Optus spokesperson has said that “it (SingTel) would contribute whatever (funding) we needed to.” However, we believe that such injections would stretch SingTel’s balance sheet, which currently stands at 1.1x net debt/annualised EBITDA, and drain SingTel’s cash of S$1.1bn. This may hamper SingTel’s ability to pursue any acquisitive opportunities.

Telstra holds the advantage. Telstra holds the advantage by virtue of its incumbency, as it has cost advantage given its ownership of the copper network and passive infrastructure, scale and expertise. If Telstra loses, we believe it is likely to proceed with its own network along the lines of its proposal and roll out faster and gain access to consumers faster by undercutting the business case of the official NBN bid.

That said, Optus has sought an “overbuild” protection in its bid. i.e. to stop other players (especially Telstra) from rolling out their own network to compete with its NBN. However, it is uncertain if upgrading Telstra’s network will be considered building an alternative network and whether the government will grant Optus, if they win, the overbuild protection.

Valuation and recommendation

Maintain earnings forecasts, Neutral rating and sum-of-the-parts target price of S$2.72. Given the many moving parts and lack of transparency surrounding the NBN process, we are retaining our earnings forecasts and target price of S$2.72 for SingTel. Also intact is our NEUTRAL rating. We believe the stock lacks catalysts due to currency volatility despite its holdings in free cash flow-positive Tier-1 telcos in the region.

Positioning for the future

• Volatile stability. We came away from SingTel’s investors’ day with the view that defensiveness is tempered in the short term by its aggressive ambitions in Singapore and volatile currencies.

• Capital management. SingTel has no plans to buy back shares and prefers capital reductions to reduce the number of shares outstanding. It believes there is room to raise its gearing, currently at 1.2x net debt/EBITDA and 0.35x net debt/equity, and will review it when needed.

• Continued aggression in Singapore. We believe SingTel will continue to acquire market share aggressively despite its leadership position in mobile and broadband to position itself for higher multimedia spending by consumers in the future.

• Australia ambitions. We continue to doubt Optus’s ability to pull off the next generation broadband network (NBN) project without the support of larger partners.

• No slowdown in India. Bharti does not expect its growth to be derailed by the economic downturn and does not expect its leadership position to be threatened.

• Further margin compression in Indonesia. Telkomsel expects EBITDA margins to decline 3-5% pts if mobile termination rates are cut. However, it has not felt any impact from plunging commodity prices on usage or subscriber growth.

• Maintain NEUTRAL with an unchanged S$2.72 sum-of-the-parts target price. Despite its historical trough valuations, we believe upside potential will be capped by potential margin pressure in Singapore from aggressive customer acquisitions and volatile regional currencies.