SGX Yield Stock

Three thorns – Bharti, currency and ICO

• Instead of easing, competition is intensifying in India; a weak Rupee compounds the problem further

• Upcoming Inter Connect Offer (ICO) may spur faster fiber adoption along the S-curve in Singapore

• The stock is trading at 13.4x PE versus 13.2x historical mean; Downgrade to HOLD as we see total potential returns of only 5% including dividends

Tariff cut of ~50% in India from May onwards. Leading operators including Bharti have lowered tariffs to 0.5 paisa per sec from 1.0 paisa through discount vouchers. At the same time, dealer commissions have also been raised substantially. We are not sure whether market leaders have embarked on these aggressive strategies to stem market share loss or whether small operators are trying to inflate their subscriber numbers before the expiry of 2G licenses.

Weak Indian Rupee (INR) is a key concern. INR has declined another 8% against SGD over the last 3 months. Normally this should have a 1% adverse impact on SingTel’s earnings. However, Bharti has a large USD denominated foreign debt which may result in significant forex losses. This could result in FY13F earnings growth coming in lower than our below consensus projection of 50% in INR terms.

Upcoming ICO to spur fiber adoption along the S-curve. In Singapore, regulator IDA is finalising the new ICO, which should help address key bottlenecks (installation quota) and have a regular review mechanism in place for the National Broadband Network. We expect 10-15% increase in the regular installation quota in 3Q12E and a similar increase in 4Q12E with six monthly reviews. An aggressive ICO could result in SingTel barely achieving stable Singapore EBITDA in FY13F compared to our expectations of 3% growth. There are other cost pressures in Singapore too.

Downgrade to HOLD with SOP based TP of S$3.29. The key change is weaker INR assumption in our valuation. SingTel has outperformed the STI by 8% over the last six months, which may not continue. We like SingTel’s strategy of venturing into mobile advertising space and its bold restructuring exercise. However, we expect to see cost pressures in the near term, before rewards in the longer term.

Three thorns – Bharti, currency and ICO

• Instead of easing, competition is intensifying in India; a weak Rupee compounds the problem further

• Upcoming Inter Connect Offer (ICO) may spur faster fiber adoption along the S-curve in Singapore

• The stock is trading at 13.4x PE versus 13.2x historical mean; Downgrade to HOLD as we see total potential returns of only 5% including dividends

Tariff cut of ~50% in India from May onwards. Leading operators including Bharti have lowered tariffs to 0.5 paisa per sec from 1.0 paisa through discount vouchers. At the same time, dealer commissions have also been raised substantially. We are not sure whether market leaders have embarked on these aggressive strategies to stem market share loss or whether small operators are trying to inflate their subscriber numbers before the expiry of 2G licenses.

Weak Indian Rupee (INR) is a key concern. INR has declined another 8% against SGD over the last 3 months. Normally this should have a 1% adverse impact on SingTel’s earnings. However, Bharti has a large USD denominated foreign debt which may result in significant forex losses. This could result in FY13F earnings growth coming in lower than our below consensus projection of 50% in INR terms.

Upcoming ICO to spur fiber adoption along the S-curve. In Singapore, regulator IDA is finalising the new ICO, which should help address key bottlenecks (installation quota) and have a regular review mechanism in place for the National Broadband Network. We expect 10-15% increase in the regular installation quota in 3Q12E and a similar increase in 4Q12E with six monthly reviews. An aggressive ICO could result in SingTel barely achieving stable Singapore EBITDA in FY13F compared to our expectations of 3% growth. There are other cost pressures in Singapore too.

Downgrade to HOLD with SOP based TP of S$3.29. The key change is weaker INR assumption in our valuation. SingTel has outperformed the STI by 8% over the last six months, which may not continue. We like SingTel’s strategy of venturing into mobile advertising space and its bold restructuring exercise. However, we expect to see cost pressures in the near term, before rewards in the longer term.

A CEO Who Deserves Every Cent

A fair day’s wage for a fair day’s work. For running an organisation of SingTel’s complexity and the most highly valued, most profitable Singapore company to boot, SingTel CEO Chua Sock Koong is fairly and not excessively compensated. Arguably, Ms Chua has made a significant contribution to improving SingTel’s executive remuneration system since she stepped up to the role in 2007. We currently have a SELL call on SingTel (with a SOTP-derived TP of SGD2.82) but this is certainly not due to the way its top executive is paid.

Good value for money. Despite our currently negative view on the stock, SingTel’s recently-released FY3/12 annual report showed that Ms Chua has given good value for what she was paid. In FY3/12, she received SGD4.9m in cash compensation, putting her just somewhat above the median for other CEOs of similar stature in Singapore, although SingTel is one of only two Singapore companies that earn an annual net profit of over SGD3b (excluding the Jardine Group).

Executive pay tightly correlated to total shareholder return. In the past few years, SingTel has linked its CEO compensation to Total Shareholder Return (TSR), a benchmark that combines both capital appreciation and dividends. In Ms Chua’s case, this tight correlation is not so surprising as she was group CFO before being appointed to the CEO position in April 2007, and she had played a key role in developing SingTel’s remuneration system. This correlation did not appear to have been so clear with her predecessor, Mr Lee Hsien Yang.

Yin and yang, night and day. While Ms Chua’s compensation has been more closely related to TSR, Mr Lee’s had at times lagged shareholder returns, particularly in FY3/04 when TSR rose 79% while Mr Lee’s pay rose by only 32%. This might have led to the big increase in his remuneration when he stepped down in 2007. In Ms Chua’s case, despite the fact that she had also cashed in on her performance shares recently, the discrepancy was not so large.