SingTel reports big subscriber gains in Q3

Growth reflects strong take-up of iPhone 3G and other initiatives

An exclusive bite at Apple’s iPhone 3G has helped put Singapore Telecom’s mobile subscriber base in the pink of health, with the operator chalking up the biggest subscriber gains in the third quarter of this year.

SingTel added 45,000 new post-paid mobile customers in Q3, more than twice as many as its two major rivals.

StarHub reported ‘net add’ of 17,000 new post-paid subscribers or users who sign up for a monthly call plan, while MobileOne added 4,000.

‘The growth in the number of post-paid mobile customers is the highest quarterly increase in recent years,’ SingTel said yesterday. ‘This reflected the strong take-up of the iPhone 3G as well as the success of targeted acquisition initiatives.’

SingTel launched Apple’s second-generation touch-screen handset with three dedicated subscription plans on Aug 22. StarHub and M1 were expected to follow suit by the end of this year but confirmed last week this will not happen because Apple is focusing distribution efforts on markets where the phone has yet to debut.

Since the iPhone 3G is only sold with a SingTel plan here, the company’s Q3 mobile statistics show that fewer than 45,000 units were sold a month into its debut. Apple forbids telcos from disclosing iPhone sales figures, but some industry watchers put the local volume around 60,000 so far.

Sales of the iPhone 3G may have lifted SingTel’s subscriber base in the Q3, but the victory was achieved at the expense of short-term profit. This is because the handset is sold with a heavy upfront subsidy which can only be recovered through long-term subscription and solid mobile data usage. SingTel warned last week that its Ebitda – earnings before interest, taxes, depreciation and amortisation – for local operations will be slashed by about $27 million as a result higher phone subsidies.

In Q3, the company added 76,000 new pre-paid customers on the back of strong demand among foreign workers, taking its total customer gain to 121,000.

On a regional level, SingTel, which reports its Q2 results today, said its combined subscriber base across its eight markets jumped 9.6 per cent sequentially to 216.7 million at end-September.

Indian associate Bharti recorded the biggest improvement, adding 8.1 million customers in Q3. Indonesian unit Telkomsel and Thailand’s AIS added 8.06 million and 810,000 subscribers respectively.

Philippine operator Globe reported a quarterly increase of 1.01 million customers, while Pakistani telco Warid and PBTL in Bangladesh enjoyed double-digit gains.

SingTel shares closed 6.4 per cent lower at $2.35 yesterday.

One more associate disappoints

Story: Globe Telecom’s 3Q08 net profit declined 22% y-o-y, which is significantly lower than our expectations of flat earnings. This is third consecutive quarterly disappointment from Globe, whose 9M08 profit has declined 9% yoy. We understand that Globe’s earnings are under pressure due to lower phone use among subscribers and intense competition in the sector. Globe contributes about 5.6% of SingTel’s earnings. As such adverse impact on SingTel’s full year earnings would be close to 0.5%.

Point: We want to highlight two key points. Disappointing numbers even if we ignore exchange rate. We expect SingTel to report 2Q09 underlying net profit of S$800m down 13% y-o-y on 12 Nov. Except Bharti, all the regional associates, along with Singapore and Australia operations are expected to be significantly below market expectations, even if we ignore the impact of unfavorable exchange rates.

Street too bullish but downside risks can weigh more. We anticipate street to start cutting SingTel’s earnings estimates after seeing 2QFY09 disappointment. Our FY09 and FY10 numbers are 12% and 16% below consensus respectively. If forex rates stay at current levels, SingTel’s FY09F earnings could be 2%-3% lower than our current projections. Every 10% decline in the AUD, INR or IDR should lower group earnings by c.2% each.

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.

SingTel to hang on to iPhone monopoly

SINGAPORE Telecommunications will continue to be the only local telco to be given a bite at the iPhone 3G as a change in Apple’s distribution strategy has thwarted the year-end launch plans of rivals StarHub and MobileOne.

‘As we have been advised that there has been a change in the distribution schedule of the iPhone in Asia, this is likely to affect M1’s plans to sell the device by the end of the year,’ a company spokesman told BT.

Similarly, StarHub also confirmed that it will not be able to bring in the second-generation Apple touch-screen handset by 2008.

‘It appears the launch (of the iPhone) will not take place this year. They (Apple) have their priorities for signing on distributors,’ StarHub CEO Terry Clontz told reporters during a phone briefing for the firm’s third-quarter results yesterday.

With Singapore’s small mobile customer base and the existing SingTel agreement, Apple is focusing its efforts on other countries where the iPhone has yet to make its debut, he explained.

Despite this development, Mr Clontz maintained that the iPhone deal is ‘non-exclusive’ here and the coveted gadget will be carried by other operators in future, a move which is consistent with other countries such as Australia and the United States.

Apple ditched its once-exclusive partnership approach when it unveiled the iPhone 3G and started working with multiple players to drive mass consumer take-up of the new device.

When SingTel launched the iPhone locally on Aug 22, both StarHub and M1 said they were confident of breaking the product monopoly by the end of the year and advised consumers to hold out for better deals.

Mr Clontz admitted that StarHub ‘did see an impact’ on its mobile business shortly after SingTel’s iPhone introduction but claims the pent-up demand for the handset has since subsided.

To forestall the competition, SingTel is halving the monthly fees for its iPhone subscription plans in Singapore for three months to draw a second wave of buyers and encourage more defections from rival camps.

Profit warning


Downside risk to our conservative forecast

SingTel warned that 2QFY09 EBITDA will be affected by S$27m in Singapore and A$44m in Australia from subsiding 170,000 iPhones. SingTel also said that the weaker regional currencies will impact SingTel’s results, and Telkomsel’s September quarter results were below expectations.

Approximately S$67m in currency translation gain will be reported, which arose from SingTel Australia Investment reducing it’s A$ denominated share capital by A$249m in 2QFY09. The gain is the difference between the amount of share capital returned by SAI and the historical cost of investment in S$.

Comments

2% pt EBITDA impact in 2QFY09.
While we were not surprised at the profit warning as our forecast is already below SingTel’s earlier guidance, the quantum of subsidy was a surprise. We had warned of a disappointing 2QFY09 results on iPhone-related expenses in Singapore and weak associate contributions. We estimate an EBITDA impact S$82m based on the average S$/A$ exchange rate in 3Q08, which works out to be about 2% of SingTel’s FY09 EBITDA margin and 1.6% of net profit, or 7% of 2QFY09 EBITDA and 6.5% of net profit.

2Q09 net profit expected to decline qoq. Based on the above disclosure and Telkomsel’s 3Q08 results, we now think SingTel’s 2QFY08 core net profit may fall about 5-7% qoq or 11-13% yoy to S$800m-820m vs our previous estimate of flattish qoq or $870m-900m. This is on the back of a 0.6% qoq decline in revenue to about S$3.75bn and 2% pts qoq decline in EBITDA margin.

Downside risk to earnings estimate. We think there is downside risk to our alreadyconservative forecast. Our FY09 and FY10 forecast is 10% and 13% below consensus, due lower assumptions for Singapore, Australia and regional currencies/associate contribution.

Impact on StarHub and MobileOne? Based on the above data, we estimate SingTel subsidised S$480 per iPhone on average. MobileOne (M1 SP, Outperform, Target price: $2.24) or StarHub (STH SP, Underperform, Target price: S$2.30) are expected to offer the iPhones by year end when SingTel’s exclusivity ends, and we think they will incur similar subsidies as SingTel. As such, we see further pressure on margins of both telcos thanks to higher subscriber acquisition and retention cost from the iPhone.

Valuation and recommendation

Maintain UNDERPERFORM with a SOP-based target price of $2.37. Key downside catalysts are:

• aversion towards emerging market assets which SingTel has exposure to, namely Indonesia, India and Pakistan,
• competition concerns in Singapore and Australia,
• volatile currencies, and
• earnings disappointment.

Singtel will be announcing its 2QFY09 results on 12 Nov.

Worse than expected Telkomsel results and weak Singapore, Australia

Story: SingTel could report 2QFY09F net underlying profit of S$800m (-13% y-o-y, -8% q-o-q) on Nov 12. Full year street estimates suggest that the market is expecting flat to single digit earnings growth. So a 13% earnings decline could trigger a series of earnings downgrades on the street.

Point: We wish to highlight three key points.

Major disappointment from Telkomsel. Compared to our expectations of single-digit earnings growth, Telkomsel reported a 20% y-o-y drop in 3Q08 earnings in its pursuit of market share. This coupled with a weak IDR (down 8%) imply that its earnings contribution would fall 25% y-o-y. We now estimate overall associate contribution would fall 5% y-o-y in 2QFY09F, instead of registering 3% growth.

Our FY09F and FY10F earnings are 12-16% below consensus. As per management iPhone launch has an adverse impact on 2QFY09 EBITDA of S$27m in Singapore and A$44m in Australia. Overall, we lower our FY09 and FY10 group earnings by 3.4% and 5.1% respectively.

Downside risk to earnings if forex situation does not improve. Every 10% decline in the AUD, INR or IDR should lower group earnings by c.2% each. Our analysis indicates if forex rates stay at current levels, SingTel’s FY09F earnings could be 2%-3% lower than our current projections.

Relevance: Downgrade to FULLY VALUED, with SOTP-based revised target price of S$2.34. We lower our valuation for Telkomsel and use current market prices for listed associates instead of target prices in view of potential earnings disappointments. We advise investors to accumulate SingTel towards our trough valuation of S$2.02.