SingTel – DBSV
Needs higher payout ratio to outperform
• Bharti may grow slower than expected, eroding SingTel’s appeal as a cheap proxy to Bharti.
• Slow adoption of Android phones in Singapore is not helping SingTel either.
• Downgrade to HOLD with lower TP of S$3.20. Special dividends cannot be ruled out with 4Q11 results in order to compensate for lack of earnings growth.
Trimmed FY12F/13F group earnings by 4% / 6% mainly due to Bharti. While improved competitiveness in India and margin improvement in Africa bode well for Bharti, we underestimated the cost pressure from 3G rollout in India. Keeping in mind, higher depreciation & amortization and tax expenses, we downgraded Bharti’s earnings growth in FY12F to 15% from 30% earlier.
Slow adoption of Android phones. Singapore continues to lag behind markets like US and UK in terms of popularity of Android based phones, which require lower subsidies than iPhones. Higher breakeven costs of iPhones may continue to burden the margins of cellular players in Singapore.
Needs higher payout ratio to outperform in our view. We are projecting a 70% payout ratio for FY11F/12F, towards the top end of SingTel’s guidance of 55%-70%. Given non-compelling growth prospects, SingTel needs to (i) increase its earnings payout ratio to ~80% to formulate an attractive (~6.5%) dividend yield, or (ii) perform capital management proactively on top of its 70% payout ratio. Downgrade to HOLD with revised SOTP based TP of S$3.20. The stock is trading at 12.5x FY12F PE below its 4-year average of 13.2x. As such, downside risk is also limited in our view.
SingTel – CIMB
Bharti’s 4Q11 was in line
Bharti’s 4Q11 results
Maintain Underperform. SingTel’s Indian associate, Bharti, reported FY11 results that met estimates with core profit 2% ahead of consensus (we use these for our SingTel forecasts). Consolidated topline was up 3% qoq, aided by elasticity gains in Africa and India though margins had dropped in India, partially offset by Africa. We make no adjustments to our earnings forecasts, SOP-based target price of S$3.29 and UNDERPERFORM rating for SingTel pending its results announcement on 12 May. Potential de-rating catalysts are regulatory risks in Thailand and competitive risks in Australia and Singapore.
The details
Lower qoq. Bharti’s consolidated revenue rose 3% qoq, aided by growth in both its Indian/South Asian (+3% qoq) and African operations (+3% qoq) as elasticity gains occurred in both markets. Consolidated EBITDA margins shed 0.3% pt qoq as India booked weaker margins (-0.7% pt qoq) excluding rebranding costs. This was partially offset by its African operations. The lower margins, higher interest expense from higher debt for 3G and Africa and tax caused core profit to fall 19% qoq.
More on India. Revenue grew 3% qoq on the back of increased elasticity. RPM slid only 2% qoq, pointing to intense but rational competition as RPMs have stabilised over the past few quarters. However, margins were hurt by higher network opex (addition of 3G sites, expansion in Bangladesh and Sri Lanka and its DTH business), higher access charges and spectrum fees. Mobile margins have been dropping, falling from 36.4% in 4Q10 to 33.3% in 4Q11 on higher spectrum fees.
3G and MNP. Bharti has launched 3G services in nine of the 13 circles for which it had won spectrum. It is awaiting clearance before proceeding with the remaining four circles. It is in talks with other leading operators to have a nationwide 3G presence. For MNP, there has not been much of an impact as only 1.1% of the subscriber base had requested to port and Bharti is capturing a disproportionate share of that number.
More on Africa. The bulk of tariff correction in Africa has been completed. It has also gained revenue market share in all the markets it operates in. Through the implanting
of its unique business model, it has begun to lower costs and costs/minute should continue to drop over the next 4-6 quarters. While pricing power is important, Bharti would look to reducing tariffs as costs continue to fall over this period. EBITDA margins rose 1% pts qoq (exclude re-branding initiative in 3Q) in 4Q11 and Bharti expects positive margins to continue as scale benefits flow through and as it cuts costs further. One area of potential margin concern is access charges which rose 12% qoq. Bharti is looking to drive more off-net traffic as it strives to have a more equal mix in on-net and off-net traffic. It expects the impact from traffic rebalancing to ease over the next two quarters. Other headwinds in Africa pertain to know-your-customer requirements in many countries in Africa which are more stringent than Indian requirements. Another headwind pertains to supply constraints from some strategic partners but this constraint is only expected to be short term.
DPS declared and capex guidance. Bharti declared a dividend of Rp1/share following its practice of declaring dividends in 4Q since its maiden dividend in 2009. For FY12, Bharti intends to spend US$2.9bn-3.1bn on capex. India would consume US$1.5bn, Africa, US$1bn-1.2bn and the tower business, US$0.4bn.
Valuation and recommendation
Maintain UNDERPERFORM. We make no adjustments to our forecasts, SOP-based target price of S$3.29 and UNDERPERFORM rating pending SingTel’s results on 12 May. Potential de-rating catalysts are regulatory risks in Thailand and competitive risks in Australia and Singapore.
SingTel – CIMB
Bharti’s 4Q11 was in line
Bharti’s 4Q11 results
Maintain Underperform. SingTel’s Indian associate, Bharti, reported FY11 results that met estimates with core profit 2% ahead of consensus (we use these for our SingTel forecasts). Consolidated topline was up 3% qoq, aided by elasticity gains in Africa and India though margins had dropped in India, partially offset by Africa. We make no adjustments to our earnings forecasts, SOP-based target price of S$3.29 and UNDERPERFORM rating for SingTel pending its results announcement on 12 May. Potential de-rating catalysts are regulatory risks in Thailand and competitive risks in Australia and Singapore.
The details
Lower qoq. Bharti’s consolidated revenue rose 3% qoq, aided by growth in both its Indian/South Asian (+3% qoq) and African operations (+3% qoq) as elasticity gains occurred in both markets. Consolidated EBITDA margins shed 0.3% pt qoq as India booked weaker margins (-0.7% pt qoq) excluding rebranding costs. This was partially offset by its African operations. The lower margins, higher interest expense from higher debt for 3G and Africa and tax caused core profit to fall 19% qoq.
More on India. Revenue grew 3% qoq on the back of increased elasticity. RPM slid only 2% qoq, pointing to intense but rational competition as RPMs have stabilised over the past few quarters. However, margins were hurt by higher network opex (addition of 3G sites, expansion in Bangladesh and Sri Lanka and its DTH business), higher access charges and spectrum fees. Mobile margins have been dropping, falling from 36.4% in 4Q10 to 33.3% in 4Q11 on higher spectrum fees.
3G and MNP. Bharti has launched 3G services in nine of the 13 circles for which it had won spectrum. It is awaiting clearance before proceeding with the remaining four circles. It is in talks with other leading operators to have a nationwide 3G presence. For MNP, there has not been much of an impact as only 1.1% of the subscriber base had requested to port and Bharti is capturing a disproportionate share of that number.
More on Africa. The bulk of tariff correction in Africa has been completed. It has also gained revenue market share in all the markets it operates in. Through the implanting
of its unique business model, it has begun to lower costs and costs/minute should continue to drop over the next 4-6 quarters. While pricing power is important, Bharti would look to reducing tariffs as costs continue to fall over this period. EBITDA margins rose 1% pts qoq (exclude re-branding initiative in 3Q) in 4Q11 and Bharti expects positive margins to continue as scale benefits flow through and as it cuts costs further. One area of potential margin concern is access charges which rose 12% qoq. Bharti is looking to drive more off-net traffic as it strives to have a more equal mix in on-net and off-net traffic. It expects the impact from traffic rebalancing to ease over the next two quarters. Other headwinds in Africa pertain to know-your-customer requirements in many countries in Africa which are more stringent than Indian requirements. Another headwind pertains to supply constraints from some strategic partners but this constraint is only expected to be short term.
DPS declared and capex guidance. Bharti declared a dividend of Rp1/share following its practice of declaring dividends in 4Q since its maiden dividend in 2009. For FY12, Bharti intends to spend US$2.9bn-3.1bn on capex. India would consume US$1.5bn, Africa, US$1bn-1.2bn and the tower business, US$0.4bn.
Valuation and recommendation
Maintain UNDERPERFORM. We make no adjustments to our forecasts, SOP-based target price of S$3.29 and UNDERPERFORM rating pending SingTel’s results on 12 May. Potential de-rating catalysts are regulatory risks in Thailand and competitive risks in Australia and Singapore.
StarHub – CIMB
Less starry 1Q
• Below; maintain Underperform. 1Q11 annualised results were below consensus and our expectations, by 10% and 16% respectively. The underperformance was due to higher-than-expected marketing and handset costs. As expected, a DPS of 5cts was declared. We cut our FY11-13 estimates by 4-9% on lower EBITDAmargin assumptions. This brings down our DCF-based target price to S$2.41 (WACC 9.7%) from S$2.50. Maintain UNDERPERFORM on concerns over competition from NGNBN in fixed broadband and pay TV which could add to margin pressure and cross-carriage regulations that could further erode its dominance in pay TV in the mid-to-long term. These are expected to de-rate the stock. M1 is our top Singapore telco pick.
• Margins were the key feature. Contrary to expectations, EBITDA margins fell 1.7% pts qoq due to higher marketing expense (despite a seasonally weaker quarter) to drive take-up while handset costs (+10% qoq) rose from strong smartphone take-up. This overshadowed a decline in content, operating lease and maintenance costs. We believe margins will hover at these levels as StarHub shores up its fixed-broadband and pay-TV businesses through more acquisition/retention exercises and as more NGNBN-related costs flow in. Revenue was fairly flat qoq as weak mobile revenue (-2% qoq) was compensated by strong handset sales.
• By division. StarHub lost 5K postpaid subscribers qoq from the delayed effect of churns and substitution of data-only plans for other smart devices or more data/voice bundles. This, coupled with seasonality, caused postpaid revenue to fall 2% qoq. Fixed-broadband ARPU slipped to S$45 from S$46 on lower-ARPU net adds and more discounts. StarHub guided that ARPU should be S$44-45 going forward. In pay TV, it added a surprisingly strong 4K qoq (net) following discounts, free previews, free months, breadth of content as well as an increased focus on the lower-income segment.
StarHub – DBSV
Wait for better entry point after recent outperformance
• 1Q11 net profit of S$69m was at the lower end of expectations due to higher iPhone4 sales.
• Surprisingly, subscriber base declined for postpaid mobile and increased for pay TV & broadband segments.
• Declared expected 5 Scts quarterly DPS. Downgrade to HOLD for limited 3% upside potential to our TP.
Net
profit stood at S$69m (+60% YoY, -14 QoQ) versus our estimate of S$72-74m. Key reason was higher costs including (i) equipment costs which rose sequentially by S$8m to S$84m due to higher sale of iPhone 4, indicating slow adoption of Android phones in Singapore (ii) marketing costs rose sequentially by S$5m to S$42.5m due to promotional initiatives to drive take-up of multi-services hubbing packs.
Subscriber base declined across mobile but increased for pay TV & broadband. Post-paid mobile subscriber base declined by 5K sequentially to reach 1031K, due to: (i) some customers switching from data-only plans to bundled voice & data plans, and (ii) churn initiated by StarHub for non-paying customers subsequent to the implementation of business support system in 4Q10. This decline was one-off and management expects to see higher mobile subscriber base going forward. Higher marketing costs, on the other hand, boosted sequential growth in subscriber base for (i) pay TV by 4K to 542K and (ii) broadband by 3K to 325K.
Downgrade to HOLD. StarHub has outperformed STI by ~7% year to date excluding its quarterly dividends. We see limited upside potential of 3% to our DCF-based (WACC 7.6%, terminal growth 0%) TP of S$2.90. However, 7.1% dividend yield continues to be the key attraction of StarHub. We prefer SingTel as a cheap proxy to Bharti’s growth with a cushion of 6% yield.