SINGAPORE – Singapore Telecommunications Limited, Southeast Asia’s largest telco, said on Tuesday that the launch of iPhone 3G will hurt its earnings in the fiscal second quarter ended September.

SingTel, which owns Optus in Australia and stakes in several mobile phone operators across the region, said it had together with its associates sold over 170,000 iPhone packages during the quarter following their launch in July and August.

‘In line with the group’s policy, mobile subscriber acquisition and retention costs are expensed immediately on activations… Consequently, the successful iPhone 3G initiative will have a dilutive impact on earnings and margins in the near term,’ SingTel said in a statement.

In Singapore, this will reduce earnings before interest tax, depreciation and amortisation by about $27 million (US$18.26 million). In Australia, the drop in EBITDA will be approximately A$44 million (US$29.95 million).

SingTel also said its Indonesian associate Telkomsel had on Oct 31 issued a revised outlook and is now looking at low-single-digit growth in operating revenue as well as a decline in margins by about 5 per cent.

The Singapore firm did not say how the launch of iPhone will hurt results at its Indian and Philippine associate firms Bharti and Globe .

SingTel is scheduled to report its second quarter earnings on Nov 12.

Bharti’s 2QFY09 results

SingTel’s 30.5% associate Bharti’s 1HFY09 net profit of Rs40.7bn (+30.% yoy) came in within consensus estimates but was below ours (See Figure 2 overleaf). The result made up 44% of our full year forecast compared to 47% of consensus. That said, Bharti turned in a fairly strong performance as 1HFY09 revenue increased by 43% yoy on the back of robust subscriber growth of 58.5% yoy. The result was affected by forex loss of Rs5.8bn in the quarter (vs Rs1.5bn in 1Q) and a deferred tax income from a tax holiday of Rs3bn. Stripping that out, net profit would have grown 7.3% qoq and 41.3% yoy.

Revenue growth upwards. Bharti’s strategy of targeting rural users is paying off with steadily rising net adds. Bharti has been capturing a larger proportion of subscribers and extending its market share leadership to 24.6% (+0.4% pts qoq, +1.2% pts yoy), according to TRAI statistics (Figure 1). It captured 29.6% of net adds in Aug, the highest in the industry, compared with Reliance at 19.7% and Vodafone at 20.1%. This has helped it add 8m subscribers in the quarter – a record. This is a run rate that management believes is sustainable as the incremental subscribers are coming from small towns across the nation.

EBITDA margins impacted slightly. EBITDA margins came off slightly (-1.8% pts yoy, -0.5% pts qoq) due to higher network cost. This is attributed to the increase in network sites and the greater volume of consumption of diesel particularly as they pushed into rural areas where obtaining electricity to sites becomes a more drawn out process.

Competition and slower economy are surmountable. Bharti believes that new entrants, be it new or existing operators, would have difficulty in breaking in the market as tariffs are low and have little room to fall, branding would need to be built up and economies of scale are lacking. Although slowing economic growth and inflation is a concern, Bharti opines that telcos services are a substitute for travel. Mobile services are needed in rural areas where infrastructure is lacking and transportation is expensive.

Passive infrastructure. The passive infrastructure business recorded an EBITDA margin of 33.3% for 2Q vs. 36.6% in 1Q. It is in talks to sign up more tenants; Vodafone is already signed up and Idea is in the final stages. There are also ongoing talks with Telenor and Bharti is likely to sign them up given that much of their business model rests on sharing of towers. It has transferred 35,000 towers to Indus while keeping 24,000 towers on Infratel. Bharti highlighted that the listing of Infratel or Indus would only occur after 2 years (Mar 2010) once they have established themselves.

Other updates. Management noted that it had received new spectrum for 3 circles (Tamil Nadu, Bihar and Karnataka), which should alleviate congestion pressures. It has applied for more spectrum in 6 more circles. Bharti added that its Sri Lanka rollout was on track and should launch later on in the year. The recent DTH service launch in 62 cities has been encouraging thus far. It also turned free cash flow positive in the quarter, the first time it has done so.

Valuation and recommendation

Strong execution at Bharti. Bharti continues to deliver and extract profits from first time users in rural and poorer users. Subscriber momentum continues apace as its branding pull and economies of scale are clear advantages in a hyper-competitive market. We continue to view Bharti as one of the more reliable growth driver at SingTel. It is expected to contribute 22% to SingTel’s FY09 PBT.

Maintain earnings forecast, target price and UNDERPERFORM call. Pending the release of SingTel’s 2QFY09 results on Nov 12, we are maintaining our earnings forecast and SOP target price of S$2.37. We maintain UNDERPERFORM as we believe there could be more downside to the stock in the short term due to higher risk aversion towards emerging market assets and volatile currencies. However, we see value emerging over the longer term. Telecom is a resilient business, and SingTel’s key subsidiaries and associates have conservative balance sheets and generate free cash flows.

Reflecting lower emerging market growth expectations

Index-linked selling pushes SingTel down 9.6%

At $2.06 – its lowest since Feb 2004 – it’s cheaper than rival StarHub

A SINGTEL share is now cheaper than a StarHub share, after investors dumped SingTel’s stock yesterday in index-linked selling.

While concerns of Aussie-dollar weakness and slowing earnings growth have added to bearish sentiment on the SingTel stock, dealers said the sell-off was largely triggered by selling of index stocks.

SingTel slipped 9.6 per cent to $2.06 – its lowest price since February 2004 – on active volume of 43.08 million shares. StarHub closed at $2.10.

‘The market is pessimistic and is using SingTel as a proxy because that’s the most liquid stock,’ said OCBC analyst Carey Wong. ‘That’s part and parcel of being in the main index and by far having the largest market cap and being the heaviest weight in the index.’ He has a ‘buy’ call on SingTel but is placing his rating under review pending fiscal Q2 results due on Nov 12. Mr Wong is looking for more clarity on SingTel’s Australian business Optus but believes that the worst of forex losses is behind SingTel.

Yesterday afternoon, news broke that Australian-based Soul, the former SP Telemedia, has withdrawn from a SingTel-led group bidding to build Australia’s national high-speed Internet network – the second company to do so after Telecom Corp quit last week. This may undermine the consortium’s chances of success.

Analysts believe that yesterday’s share sell-off had less to do with SingTel’s fundamentals, although there has been some bad news recently. SingTel said earlier this week that Optus will cull 115 jobs from its key Optus Networks division, which oversees the deployment and maintenance of wireless and fixed-line infrastructure. SingTel has imposed a headcount freeze in Singapore and introduced cost-cutting measures.

A local tech analyst noted that SingTel’s fundamentals remain relatively better than those in many other sectors and that its earnings are more resilient than those of other telcos.

But recent expenses, such as sponsorship of the Formula One Grand Prix and the initial cost incurred in carrying Apple’s iPhone, could add to woes of rising costs and eroding margins.

Analysts have trimmed their forecasts for SingTel to price in the impact of the economic slowdown. They expect higher costs and slower revenue growth in FY09.

Noting that SingTel faces earnings pressure domestically and overseas, DBS Vickers analyst Sachin Mittal trimmed his FY09 and FY10 earnings forecasts by 5.5 per cent and 7.5 per cent respectively to price in potentially disappointing growth at India’s Bharti next year and lower corporate spending in Singapore. He maintained a ‘hold’ call on the stock.

ABN Amro analysts Ian Martin and Arthur Pineda said in a report that they are cutting their forecasts for revenue growth and margin gain at Optus in the context of an economic slowdown. ‘We believe negative risks are more evident than positive ones,’ they said. ‘Negative risks include a more rapid slowdown in revenue growth in Singapore and among associates.’

They changed their rating on the stock to ‘hold’ from ‘sell’, given the sharper than expected fall in the share price.