Domestic and regional woes

Story: SingTel is facing challenges on both the domestic and regional fronts.

Point: We want to highlight four key points.

1. Possibly disappointing growth at Bharti next year. The market seems to underestimate the impact of mobile number portability (MNP), to be implemented June 2009. We trimmed our FY10F and FY11F earnings for Bharti by 5% and 6%, respectively. Using higher equity risk premium, we lowered Bharti’s target price to Rs850. Bharti remains the most expensive telco in Asia-Pacific at 16x FY09F PER.

2. Revised forex assumptions. We lowered the AUD/SGD exchange rate assumption by 10% to 1.15, and expect it to average 1.10 in 2HFY09. We raised our SGD/INR rate by 5% and expect it to average 31.5 in 2HFY09. A 10% decline in the AUD, INR or IDR would lower group earnings by c.2% each.

3. Lower corporate spending in Singapore. The slowing economy could result in businesses postponing their expansion plans. SingTel has more exposure to corporate spending relative to other local telcos. We trimmed revenue growth for Singapore to 5% (from 6% earlier) for FY09F, and to 2% (from 4%) for FY10F.

4. Impact of National Broadband Network (NBN). NBN could result in some loss of revenue from leasing of local circuits, where SingTel currently has virtual monopoly. We estimate overall loss of earnings arising from the NBN at S$100-150m, or 2-3% of group earnings in FY11 and beyond.

Relevance: We lowered our FY09F and FY10F earnings by 5.5% and 7.5%, respectively; they are now 5% and 8% below consensus estimates. Maintain HOLD for SingTel, with SOTPbased target price of S$3.10. Our stress test indicates a bear case target price of S$2.58 if associates de-rate to their historical low valuations.

Raising fixed line rates

SingTel will raise both residential and business fixed line voice: a) subscription rates and b) call charges from 1 Jan 09, as summarised below. Subscription fee is raised by 7-10% and call charges by 14%. ‘For us (in Singapore), it’s no longer business as usual.

Separately, SingTel Singapore CEO Allen Lew said, “We are already starting to see the impact of the global financial crisis on some parts of the business. We are adopting a (cost-cutting) framework that is customised for what we see as a 12 to 18 month period of uncertainty and difficult economic environment.” SingTel will also rein in “discretionary costs” such as its advertising expenses. “Until our revenue starts flowing back like the old days, we will definitely have to cut back.”

Comments

Small positive. Fixed line voice revenue contribute to 5-6% of FY10-12 SingTel Singapore’s revenue and only 2% of group revenue. Assuming a weighted average 10% increase in fixed voice revenue, with zero marginal cost and 18% corporate tax, SingTel’s FY10-12 core net profit is boosted by 0.5-0.7%. Hence, we maintain our forecast.

Fixed-to-mobile migration is unlikely to be hastened significantly as fixed line tariffs are substantially cheaper than that of mobile. Fixed line charges will be 1.6 cts/min vs mobile of tariff of 8-25 cts/min.

Valuation and recommendation

Maintain UNDERPERFORM, on SingTel with a SOP-based target price of S$3.50 over: 1) concerns over expected stiff competition between SingTel and StarHub for the exclusive rights for the 2010-2012 seasons for the Barclays Premier League and 2010 World Cup; 2) a cautious outlook. We gather that corporate users are cutting back on telco services; and 3) the appreciation of the S$ vis-à-vis currencies where it has major holdings in, namely the Australian dollar, Indian rupee and Indonesian rupiah. We are reviewing our target price given that sharp depreciation of the regional currencies vs the S$.

Our top pick in the sector is M1, which we recommend a Neutral with a target price of S$2.15 for its attractive dividend of 8%, lower risk to earnings and cash flow as it averts a costly bidding warfare over content.

More Challenges Ahead

Story: In our view, StarHub’s pay TV and broadband business are going to face more headwinds in the medium to long term.

Point: We have three key points to highlight here.

1. Broadband business under pressure from declining ARPU. After comparing with Hong Kong, we think that broadband tariffs can decline by almost 50% in two to three years time. Currently, broadband business accounts for an estimated 23- 24% of StarHub’s EBITDA.

2. Pay TV business to experience higher cost of content. Two of the most popular contents – English Premier League (EPL) 2010-2012 and FIFA World cup 2010 are up for renewal in the middle to late 2009. With a more aggressive SingTel, the content cost could even double from an estimated S$150m for EPL in 2006. This could further escalate the losses of the pay TV business for StarHub.

3. Our revised FY08 and FY09 earnings estimates are 3.5% and 7.5% below consensus. We have lowered our FY08 and FY09 earnings estimates by 2.9% and 3.6% respectively. We think the key difference from consensus could be the EBITDA estimates for cable TV and broadband segment. We expect the margins to fall sharply in this segment as indicated in table on the next page. We expect mobile margins to fall gradually over the time.

Relevance: We peg our target price to 14x average FY08-FY09 EPS at 20% premium to our target PER of 12x for M1, towards the lower end of StarHub’s historical PER range (13.3x-19.4x) when it was considered a growth stock. We maintain FULLY VALUED with revised TP of S$2.50. Additional 6% yield from capital management assuming target of 1.5x net debt to EBITDA depends on the decision to participate in OpCo bidding.

SingTel may cut spending, rates amid market turmoil

SINGAPORE Telecommunications Ltd (SingTel), South-east Asia’s largest telecommunication services company, may spend less than planned in its domestic market and cut rates as slowing economic growth and financial-market turmoil curb customer spending.

‘The tea leaves are indicating that things are going to be very uncertain,’ Allen Lew, chief executive officer of SingTel’s operations in the city-state, said in a Bloomberg Television interview broadcast yesterday. The company will ‘start to curtail some of our unnecessary spending and be a bit more cautious’, he said.

SingTel, whose operating expenses in Singapore rose 14 per cent in the quarter ended June, said it plans to cut costs and reduce some fees on concern that clients will delay orders.

The US government bailed out American International Group Inc for US$85 billion and Lehman Brothers Holdings Inc filed for bankruptcy this week, following the collapse of Bear Stearns Cos in March.

‘SingTel will have to be very aggressive in trying to cut costs and minimise the impact on margins as everyone else looks to delay orders now,’ said Voon San Lai, an analyst at Cazenove Asia Ltd in Singapore who rates the company ‘underperform’.

The phone operator ‘could also cut handset subsidies and staffing might be reduced’, he said.

Mr Lew, 53, declined to elaborate on the cost cuts. Operating expenses in Singapore rose to S$743 million in the three months to June 30, from S$652 million a year earlier.

SingTel on May 14 projected that capital spending in Singapore will rise to a ‘mid-teens’ percentage of revenue, as the company adds mobile capacity and upgrades its fixed-line network. It spent 8.8 per cent of sales for the 12 months ended March 31, compared with 8.5 per cent a year earlier.

The company had 10,651 employees in the city-state at the end of June, or about half of its total workforce. ‘We’ve a lot of corporate banking customers and you know these are the areas where there’re a lot of challenges right now,’ Mr Lew said.

SingTel is seeing some companies ‘being more cautious in terms of their capital expenditure and their expansion plans’, he said. The operator will consider cutting charges for business clients on a case-by-case basis, Mr Lew said.

Global economic growth will slow to 4.1 per cent this year and 3.9 per cent in 2009 from 5 per cent last year, the International Monetary Fund predicted in July.

SingTel joins Tata Consultancy Services Ltd and Infosys Technologies Ltd, India’s largest software-services companies, in expecting financial firms to delay orders.

Nortel Networks Corp, North America’s biggest phone-equipment maker, on Wednesday said sales will fall this year as companies hold back investments. Bloomberg