2Q Results

2Q FY09 Results. SingTel reported 2Q FY08 operating revenue of S$3,891m (+5.3% yoy) and net profit of S$868m (-12.1% yoy). Revenue increased due to the growth of the Singapore and Australian postpaid mobile market.

However, net profit was lower because of the introduction of iPhone 3G, the depreciation of the regional currencies and weaker earnings from the regional mobile associates. Excluding the depreciation of the Australian dollar and the regional currencies, net profit would have declined by a smaller amount of 5 percent. It also announced an interim dividend of 5.6 cents per share. This was the same as the interim dividend declared in FY08.

Performances. In Singapore, SingTel continued to post double-digit revenue growth of 10.3 percent to S$1.33 billion due to success in gaining market shares in the data and mobile businesses. In particular, this was boosted by the successful launch of iPhone 3G on 22 August 2008. Moreover, in Australia, Optus achieved an increase in operating revenue of 6.8 percent to A$2.06 billion despite a highly competitive market.

The regional mobile associates posted weaker-than-expected results for the quarter. Pre-tax earnings dropped 25.5 percent to S$461m due to the depreciation of 8 percent to 17 percent in the regional currencies and poor performances from Telkomsel, Globe and Warid.

FY09 Outlook. Management expects its operating revenue for the Singapore and Australian businesses to grow. It also anticipates the overall pre-tax earnings contributions of the region mobile associates to decline for FY09. Furthermore, there will be negative impact on the revenues and profits from the depreciation of the Australian dollar and the regional currencies against the Singapore dollar.

Maintain BUY recommendation, target price reduced from S$4.01 to S$3.86. Due to the lower-than-expected profit from SingTel, we have reduced the target price to S$3.86. We anticipate that the regional mobile associates will continue to face competition in their respective regional markets. Moreover, the strengthening of the Singapore dollar against most currencies will result in lower profits for Optus and the regional mobile associates.

Nevertheless, SingTel remains a BUY for investors. This is because its business continues to grow in Singapore and Australia with revenue contributions from its regional mobile associates.

SingTel sees job cuts as a last resort

Q2 net profit down 12%; group looking to redeployment to cut operating costs

Singapore Telecommunications’ quarterly profit may have skidded to a three-year low, but it will look to redeployment instead of retrenchment to cut operating costs.

‘Certainly, job cuts will be something that we see as a last resort,’ said SingTel CEO Chua Sock Koong.

The group yesterday reported a 12.1 per cent fall in net profit to $868 million for its second quarter ended Sept 30, from $988 million a year earlier. Basic earnings per share slipped 12.2 per cent to 5.45 cents, while revenue eased 5.3 per cent to $3.89 billion.

With its second-quarter earnings having been dented by plunging regional currencies and higher handset subsidies, SingTel has already frozen hiring and is also cutting down on discretionary spending such as advertising expenditure in Singapore and Australia. But instead of cutting manpower, it could use reassignments to glean more savings.

‘As a business, we continue to review the operating efficiencies of each of our businesses to ensure we deliver a high quality of service to our customers. As part of this efficiency drive, there could be redeployment of headcount across the different businesses,’ Ms Chua told reporters at the group’s Q2 results briefing yesterday.

Her assurance of job security should provide some welcome relief for SingTel’s pool of 11,130 employees here following its recent profit warnings and the announcement of 900 jobs cut by another local corporate titan, DBS Group Holdings, last week.

Reiterating its guidance last week, SingTel said its profitability took a hit in Q2 as the Sing dollar’s sustained appreciation against major regional currencies crimped contributions from all its foreign units.

The company derives nearly 60 per cent of its earnings from overseas through wholly-owned Australian operator Optus, as well as regional associates in India, Bangladesh, Indonesia, Pakistan, the Philippines and Thailand.

Contribution from Optus shrank with the Australian dollar dropping against the Singapore dollar this year. Other currencies such as the Indian rupee, Thai baht and Philippine peso also fell, lowering earnings from associated companies such as India’s Bharti, AIS in Thailand, and Globe in the Philippines.

During the quarter, profitability was further dampened by losses from Warid Telecom. SingTel’s Pakistani investment suffered a wider-than-expected pre- tax loss of $41 million, with the group’s share of pre-tax operating losses at $24 million, but this was mitigated by a one-time foreign exchange gain of $67 million following a capital reduction in SingTel’s Australian unit.

‘We’re still in the phase of rolling out networks (in Pakistan). There has also been a reduction in consumer spending (there) as a result of the financial crisis,’ Ms Chua explained.

As a result, pre-tax profit contributions from the firm’s six regional associates plunged 26 per cent during the quarter.

Profits from Optus remained flat in Q2 while net income from Singapore operations fell 4.8 per cent as a result of higher marketing costs and subsidies associated with the iPhone 3G.

The Republic’s largest operator was given first dibs at selling Apple’s second-generation touchscreen handset in Singapore on Aug 22. Optus launched it a month earlier as part of a non-exclusive arrangement. Hefty subsidies for the iPhone 3G slashed Ebitda (earnings before interest, tax, depreciation and amortisation) in both countries by nearly $71 million, according to SingTel.

‘We are confident that iPhone customers will deliver growth and value,’ Ms Chua reiterated, adding that the Arpu (average revenue per user) from iPhone owners is 1.5 times higher than other post-paid mobile customers.

SingTel has collectively sold more than 170,000 units of iPhone 3G to date in Singapore, Australia, India and the Philippines.

In Singapore, the much- hyped device lifted SingTel’s post-paid subscriber base by 45,000 from July to September – twice as many as rivals StarHub and MobileOne. Revenue also grew across all its local business lines, with its cellular and Internet units both chalking up double-digit gains.

‘Overall, Singapore and Optus delivered good numbers. Associates’ contribution was weak mainly due to currencies, and the extent of losses at Pakistan investment Warid took us by surprise,’ Macquarie Research said in a research note.

For the first half of its financial year, SingTel’s net profit dropped 8.8 per cent to $1.74 billion while operating revenue rose 5.6 per cent to $7.67 billion. Stable free cash flow for the group – defined as operating cash including associate dividends less cash capex – stayed at about $1.7 billion for H1 FY09. Net debt gearing ratio increased 1.6 percentage points to 25.8 per cent on the back of additional bank borrowings.

SingTel has declared an interim dividend of 5.6 cents for the six months ended Sept 30, unchanged from 2007.

Looking ahead to the full year, SingTel still expects its operating revenue and Ebitda in its two core markets – Singapore and Australia – to grow but pre-tax earnings from its regional associates are set to be lower compared to last year.

‘The weaker Australian dollar will have an adverse impact on the earnings for the group. What will hit it further is the lacklustre performance of its regional associates. Telekomsel, in particular, saw pre-tax profit slump 40 per cent to S$113 million (in Q2),’ noted Terence Wong, co-head of research at DMG & Partners.

SingTel shares closed 1.3 per cent higher at $2.38 yesterday.

Weak across the board

• Below expectations. Annualised 1HFY09 core net profit was 5% and 15% below our estimate and consensus expectations respectively, as we had flagged earlier. This was due to a weaker A$, higher subscriber acquisition and retention costs (SARC), and weak associate contributions. 2QFY09 core net profit fell 7% qoq and 12% yoy to S$801m, within our expectation of S$800m-820m. SingTel declared a DPS of 5.6 cts, unchanged yoy and representing a 51% payout, in line with its policy of 40-60%. Its DPS is in line with our forecast of 11 cts for FY09.

• Weak across the board. Group EBITDA margins fell 2.3% pts qoq on sharply higher SARC, largely due to subsidies for the iPhone for both SingTel and Optus. Associate contributions fell 21% qoq predominantly due to Telkomsel’s weaker showing.

• Lowered guidance. As expected, SingTel guided down its expectations for FY09. Group revenue and EBITDA “will be negatively impacted by depreciation in the Australian dollar” compared with expectations of growth previously. Also, associate contributions will be lower yoy vs. low double-digit growth previously.

• Maintain Underperform. We are maintaining our forecasts and sum-of-the-parts target price of S$2.37 pending a conference call this morning. We expect to cut our FY09 estimates after the call. Reiterate UNDERPERFORM on the back of the weak results.

Earnings drag

Below expectations. In the second quarter to 30 Sep 08, revenue increased 5.3% to S$3.89b while underlying net profit slid 12.3% to S$801m. The bottom line came in below our expectations due to a confluence of negative factors – high acquisition and marketing costs for the iPhone 3G initiative, weaker regional currencies, lower earnings from Indonesia’s Telekomsel resulting from price competition and post-tax loss from Pakistan-based Warid Telecom. Taking away the impact of the depreciation in Australia and regional currencies, SingTel would have registered a fall of 5% in earnings, which would still have been lower than
our estimates.

Free cash flow and balance sheet still robust. Free cash flow inched up 1.1% to S$1.14b, with S$195m coming from Singapore, S$316m from Australia and S$629m from regional associates. Balance sheet strength remains. It has a net gearing of 26% and a Net debt/EBITDA of 1.1x.

Mobile numbers continue to grow. The Group’s customer base hit 216.7m, rising 37% YoY and 10% QoQ. Its six regional associates saw increases in their mobile clients by between 15-59%, with Bharti (+8.1m to 77.5m subscribers) and Telekomsel (+8.1m to 60.5m) leading the charge. There were also cheers for the Singapore operations on this front as it saw the biggest growth in recent years for its post-paid business. It had quarterly net adds of 76,000, thanks to aggressive marketing campaigns as well as strong take-up of iPhone 3G. With another 45,000 increase in pre-paid customers, SingTel Singapore grew its base to 2.9m, extending its lead with a market share of 45.9%. It was 44.7% a quarter ago and 40.3% a year ago.

iPhone, the margin muncher. Given that mobile subscriber acquisition and retention costs are expensed immediately upon activation, the iPhone 3G initiative had a dilutive impact on earnings and margins, hitting EBITDA by S$27m in Singapore and A$44m in Australia, which was in line with management’s guidance last week. EBITDA margins would have been 2.6ppt higher at 40.1% (against a reported 37.5%) in Singapore and 3.0ppt higher at 26.2% (23.2%) in Australia.

Regional business takes a big knock. The regional associates slumped 26% to S$461m as they fell victim to declining currencies vis-à-vis S$, as well as weaker performances from Telekomsel, Warid and Globe. Stripping off currency changes, the combined operations of the regionals would have been 16% lower. The associates have a considerable impact on the Group, given that they now account for 41% of Group EBITDA. Including the 31% contribution from Optus, SingTel’s overseas operations account for a significant 73% of EBITDA.

No more clear blue skies. SingTel expects its core markets in Singapore and Optus to grow its revenue and EBITDA. But the weaker A$ will have an adverse impact on the earnings for the Group. What will hit it further is the lacklustre performance of its regional associates. Telekomsel, in particular, saw pre-tax profit slump 40% (in S$ terms) to S$113m. In our recent note where we downgraded SingTel, we had anticipated the associates’ to grow 3% in FY09, down from our earlier target of 9% growth. However, we are now expecting the associates’ contribution to be 15% lower compared to a year ago.

Earnings downgraded. As a result of the revised outlook, we have lowered our earnings by 9.5% from S$3.81b to S$3.45b (-12.3% YoY) in FY09 and 9.9% from S$4.12b to S$3.71b (+7.6% YoY) in FY10. We have also reduced our sum-of-theparts valuation from S$2.80 to S$2.67, mainly due to the bleaker forecast for its associates. Maintain NEUTRAL.

Regional Associates Take a “U” Turn

Story: Underlying net profit of S$801m (-12.4% y-o-y, -7.4% qo-q) was exactly inline with our expectations of S$800m. Assuming no forex change from 2QFY08, net profit would have declined 5% y-o-y. The result could disappoint the market, as street estimates suggest flat FY09 earnings versus our estimate of 7% decline y-o-y.

Point: We want to highlight four key points.

Singapore and Australia better than our expectations, despite adverse iPhone impact. Singapore EBITDA at S$500m was down 1.8% y-o-y only despite S$27m adverse impact of iPhone launch. Australia EBITDA at A$479m was up 0.4% y-o-y, despite A$44m adverse impact of iPhone launch.

Regional associates below our expectations. Associate contribution was down 25.5% y-o-y compared to our estimate of single digit decline. Assuming no forex change from 2QFY08, associate contribution would have been flat. What surprised us was Bharti’s pre-tax earnings contribution, down 5.1% y-o-y, against our expectations of 10% growth. SingTel has attributed the decline to S$57m fair value loss on Bharti’s foreign borrowings. We did not see this item in Bharti’s results and need to check with management on the disparity. The other associates were more or less in line with our expectations.

Maintained guidance for Singapore and Australia. Surprisingly, management maintained its guidance of EBITDA growth for Singapore and Australia. In our estimates, we have assumed Singapore EBITDA to be flat and Australia EBITDA to decline 1.5% y-o-y (AUD).

Lowered guidance for associates. Management lowered its guidance for associate pre-tax earnings contribution from “lowdouble digit growth” to “lower than last year”. In our estimates, we have assumed associate contribution to decline 3.8% y-o-y, which we think has downside risks.

Relevance: Maintain FULLY VALUED, with SOTP-based target price of S$2.34. We advise investors to accumulate SingTel towards our trough valuation of S$2.02. In our view, if forex rates stay at current levels, SingTel’s FY09F earnings could be 2%-3% lower than our current projections.