Quarterly results can cause disappointment

Story: We expect the group to report 1QFY09 net underlying profit between S$850m and S$875m (-2.0% to +1% y-o-y) on 12 Aug 2008. We think that this could be 6-9% lower than street estimates as our full year forecast is below consensus.

Point: Indonesian associate Telkomsel reported a sharp 19% y-o-y decline in earnings for the Apr–Jun quarter, which together with the weak Indonesian currency (down 10% y-o-y) implies a 28% y-o-y decline in SGD terms. On the other hand, as per numbers reported by Indian associate Bharti, its contribution would be up 16% y-o-y in SGD terms. Telkomsel contributed 21.2% of the group earnings in FY08 followed by Bharti at 20.4%. Overall, Singapore and Australia would still contribute a healthy EBITDA growth of 4-5% y-o-y, while associates’ earnings contribution would potentially decline 5.7% y-o-y in 1QFY09.

Relevance: We have trimmed Telkomsel’s earnings estimates for FY09 and FY10 by 8% each to factor the impact of lower interconnect charges in Indonesia. This lowers our FY09 and FY10 earnings estimate for SingTel by 1.5% for each year. In our view, management’s guidance of double-digit growth in FY09 earnings for the associates may be too bullish. We maintain HOLD for SingTel with slightly lower SOTP based target price of S$3.70. However, if we use current market prices (instead of target prices) of regional associates in our SOTP valuation, SingTel is worth S$3.30.

SingTel tempers special dividend expectations

Chairman tells shareholders such payouts can’t be annual affair

SINGAPORE Telecommunications yesterday told shareholders not to expect special dividends every year, pointing out that it would not be special then.

Total dividend for financial year 2007/2008 came to 12.5 cents, following a final dividend of 6.9 cents.

Speaking at SingTel’s 16th annual general meeting, chairman Chumpol NaLamlieng said: ‘It is not the policy of the board to pay a special dividend every year, otherwise it won’t be a special dividend.’

Some 350 shareholders turned up at the NTUC auditorium for SingTel’s AGM, easily one of the largest gatherings for listed companies here. The two-hour long meeting saw a number of issues being brought up, including SingTel’s ongoing legal battle in Indonesia, the pending launch of the iPhone and why there was no special dividend paid for the year ended March 31, 2008.

Mr Chumpol pointed out that SingTel had raised its dividend policy ratio to 45-60 per cent of underlying net profit, from 40-50 per cent previously.

‘In the event, if there are special reasons, the board will consider,’ he said. ‘The last few years of special dividends and share buybacks may have led shareholders to conclude it’s a normal affair but it is not.’

Since 2000, shareholder payout has been boosted in six of the nine years by special dividends and capital reductions.

SingTel chief executive Chua Sock Koong added that special events in the past included compensation from the government for ending its monopoly ahead of schedule and divestments such as Belgian associate Belgacom.

In 2004, SingTel returned a bumper $4.1 billion to shareholders, buoyed by $3.3 billion of divestments in SingPost, Yellow Pages and Belgacom.

When one shareholder asked if SingTel could pay higher normal dividends, Mr Chumpol said: ‘If the income goes up from normal operations, then normal dividend will definitely go up.’

SingTel’s total shareholder payout since 2000 is about $22 billion, or 82 per cent of earnings over the same period.

SingTel has moved up several rungs this year to rank as the world’s No 11 telco with a market capitalisation of US$42.8 billion. Last year, with a market capitalisation of US$34.4 billion, it ranked No 19.

Its stock closed down five cents at $3.53 yesterday.

Bharti continues to charge ahead

Bharti’s 1QFY09 results

Within expectations. SingTel’s 30.5% associate Bharti reported a 1QFY09 net profit of Rs20.3bn (+34% yoy, +9.3% qoq), which was within consensus but below our expectations. When annualised, the results were 95% of consensus forecast but only 87% of ours. Nevertheless, this was another strong set of results as revenue leapt 44% yoy on the back of robust subscriber growth of 63% yoy. EBITDA margins were steady at 41.5%.

Sterling revenue growth. As it continued its rural push, Bharti extended its lead in market share to 24.8% (+0.5% pt qoq, +1.1% pts yoy). Consequently, revenue surged 44% yoy. Although ARPU was diluted by its push into rural areas, margins were propped up by economies of scale.

EBITDA margins firm. Bharti was able to sustain its margins despite the onslaught of competition and call-tariff reductions. We attribute the margin firmness to its unrivalled economies of scale. Bharti highlighted that profitability was not under pressure and it has always been focused on profitability per subscriber. With its pre-emptive move to cut rates, we believe that rivals or new entrants would have little room to manoeuvre. That said, margins across the sector could come under pressure, should competition continue to drive down tariffs.

Tying up with MTN and 3G policy. With the MTN-Reliance deal now dead in the water, talk has shifted back to a resumption of negotiations between Bharti and MTN. Should any deal materialise, we would be positive as it would help Bharti evolve into an emerging-market powerhouse. However, the risk remains the price to be paid for MTN. Recent acquisitions have been pricey and have resulted in de-ratings in the share prices of acquirers.

Separately, India’s 3G policy is set to be announced soon. We believe Bharti stands a strong chance of securing the coveted 3G spectrum. This is crucial for distinguishing the company in this competitive market and in alleviating margin pressures given the premium services it would be able to offer.

Forecasts unchanged. The strong set of numbers underscores management’s ability to extract profits even from first-time users in poorer and less developed areas. Bharti’s economies of scale and unrivalled branding power set it apart from competitors and showcase its best-in-class attributes. India’s growth potential remains attractive over the near term, although margin pressures could creep in over the longer term. We maintain our earnings estimates as we see stronger quarters ahead and continue to believe that Bharti remains SingTel’s most reliable growth driver. We expect Bharti to contribute 21% of SingTel’s pre-tax profits in FY09.

Valuation and recommendation

Maintain NEUTRAL and sum-of-the-parts target price of S$4.05. We believe SingTel lacks catalysts given the mixed performance of its portfolio. With mature operations in Singapore and Australian and Telkomsel facing intense competition, Bharti is SingTel’s key earnings driver. Key risk for SingTel is earnings delivery at Telkomsel which is facing increased competition from Excelcomindo.

Strong Bharti earnings neutralized by exchange rate

Story: Bharti delivered strong earnings growth of 34% y-oy compared to our expectations of 30% growth. However, Indian rupee has weakened about 15% Y-o-Y with respect to Singapore dollar compared to our estimate of 10%. As such in Singapore dollar terms, Bharti’s earnings are inline with our forecasts.

Point: The main surprise in Bharti’s results came from stronger than expected top line growth of 44% Y-o-Y compared to our expectations of 32% growth. This was due to (a) strong subscriber addition of 2.5m per month compared to our estimate of 2.2m subscribers per month
and (b) Lower than expected ARPU decline of 2% Q-o-Q compared to our estimate of 3% decline.

Relevance: Local currencies of Thailand, Indonesia, and Philippines have declined about 14%, 10% and 4% Y-o-Y with respect to Singapore dollar till date. Since regional associates account for more than half of the total group earnings, we believe that SingTel’s earnings growth would
be limited to mid-single digit in the upcoming set of 1QFY09 results on 12th Aug 08. We maintain HOLD for SingTel with our SOTP based target price of S$3.75.

Testing support

– SingTel has been on a decline since Oct 07 and is currently testing the support at the long-term uptrend line that connects the higher lows between Mar 07 and Jan 08.

– The price consolidation at the uptrend line could result in a mild rebound. Given the positive divergence displayed by the RSI and the oversold position of the stochastic indicator, we can expect a near-term rebound to the resistance level of S$3.60 – 3.68.

– However given the weak volume on days where bullish candlestick formations occurred over the previous trading week, and the downwards trending 50-, 100- and 200-day moving averages, we feel the upside is capped at this stage.

– After the mild rebound, we expect SingTel to re-test the support at the uptrend line. If this support fails to hold, we could witness the price slide towards the support at S$3.16.