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Rough patch for Associates, forecasts and fair value cut

• SingTel’s 1QFY11 net profit came in flat YoY at S$943mil. Earnings improved for Singapore and Australia operations, but group results were dragged down by lower contribution from associates.

• Associate contribution fell 16% YoY to $541mil, making up 41% of EBIT (versus 49% in 1QFY10). This was largely due to a hefty 23% fall in contribution from Bharti Airtel in India. Bharti was hit by financing costs for its recent acquisition of Zain Africa. As a result, Bharti’s contribution to associate fell to 38% from 42% in 1QFY10.

• Contribution from SingTel’s other significant associate, Telkomsel in Indonesia, also fell at 10% YoY. This was despite the Indonesian Rupiah appreciating 9% YoY against the Singapore dollar. Mainly, expenses outpaced with Telkomsel’s network upgrades and expansion. Telkomsel made up 40% of Associate in 1QFY11 (38% in 1QFY10).

• Managment is moderating for a margin decline at Telkomsel, and Bharti’s earnings will continue to be diluted by acquisition financing costs for Zain Africa BV and investment in 3G spectrum.

• On lower associate performance, we cut full-year forecasts by 3% in FY11F to 25.0 cents EPS, and by 2% in FY12F to 26.0 cents EPS. We also update fair value to 8% lower at S$2.82, but maintain our HOLD rating for another 6% price downside.

• Singapore operations enjoyed healthy revenue growth of 10% to S$1.52bil largely due to mobile and IT/engineering segments. Key driver for mobile was a S$5 surge in postpaid ARPU to $89 as data usage pushed non-voice revenue contribution to 37% (from 32% in 1QFY10 and 36% in 4QFY10).

• However the upfront investment in smartphone proliferation squeezed Singapore EBITDA margins to 39% from 42% in 1QFY10. The boost for IT/engineering revenue is largely from fibre rollout for NGNBN.

• Optus in Australia was the star – in addition to robust net profit growth of 22% to A$170mil, contribution to SingTel was further boosted by a 9% YoY appreciation in A$/S$ rate. Postpaid subscribers continued to grow at a healthy 16% YoY. Optus accounted for 25% of group EBIT.

• Management continues to guide for mid-single digit core revenue growth for FY11F, while EBITDA margin for Singapore will be squeezed to 35% from higher pay TV content costs as Barclays Premier League commences on mio TV platform.

mio TV rings in sales of $14m in Q1

AFTER struggling to make a dent for more than three years, SingTel’s fledgling pay-television service appears to have finally stepped into the big league.

For the three months ended June 30, the company’s mio TV offering raked in sales of $14 million as subscriber numbers swelled by 19,000 to 220,000.

This is the first time SingTel has revealed the quarterly revenue tally for its pay-TV product since it was introduced in July 2007. The move provides a clear indication that the service is now starting to make a bigger top-line impact.

mio TV subscriptions spiked in the first six months of this year after SingTel managed to wrest the coveted Barclays Premier League (BPL) broadcast rights away from arch-rival StarHub.

With the new BPL season kicking off this weekend, the company said it expects to see a further increase in the coming quarters.

SingTel previously said it has wired up all local households to receive its mio TV service.

In addition, it will soon be conducting coaxial cabling trials at selected private properties. The same technology is being used by StarHub to deliver its cable television and broadband services.

SingTel’s pay-television offering currently relies on its fixed telephone line infrastructure. The experiments will give mio TV customers another option for receiving mio TV broadcasts.

This method is particularly suited for those who want the service on multiple television sets in their homes, said SingTel Singapore chief executive Allen Lew. ‘The telephone wiring when you want to use it for TV and high-speed Internet may not be optimal, depending on the age of the wiring,’ he explained.

SingTel Q1 profit down 0.2% to $943m

Weak contributions from regional units Bharti, Telkomsel, Globe hit results

Singapore Telecommunications’ net profit for the first quarter of its financial year came in flat, as improvements by its units in Singapore and Australia were negated by the weaker performance of regional associates Bharti, Telkomsel and Globe.

For the three months ended June 30, South-east Asia’s largest telco reported a 0.2 per cent dip in net income to $943 million, from $945 million a year earlier. The figure was 3 per cent lower than the average forecast of five analysts polled by Bloomberg.

Underlying earnings per share came in at 5.92 cents, down from 5.94 cents in Q1 last year, while revenue climbed 11.5 per cent to $4.3 billion.

The bottom line was weighed down by a 15.8 per cent drop in pre-tax earnings contributions from regional associates, with Bharti, Telkomsel and Globe the main culprits. SingTel derives 73 per cent of its Ebitda – earnings before interest, tax, depreciation and amortisation – from overseas.

The contribution of its largest regional associate, Bharti, fell 22.7 per cent to $210 million. The Indian operator was hit by a triple whammy of tougher domestic competition, fair-value losses from the weakening rupee and financing costs stemming from its Zain acquisition.

During the quarter, Bharti, in which SingTel has a 32 per cent stake, completed its US$10.7 billion acquisition of the African assets of Kuwait’s Zain group.

‘Africa is an important emerging market and Bharti acquiring effective control of a pan-African operation across 15 countries is a unique opportunity for Bharti to fully leverage its experience, human capital and scale to deliver future growth,’ said SingTel group chief executive officer Chua Sock Koong.

Pre-tax profit contribution from Telkomsel – SingTel’s Indonesian associate – fell 10 per cent in Q1 to $221 million. The decline was due to higher operating expenses resulting from network upgrades and higher depreciation charges.

SingTel’s share of profit from Philippine operator Globe dived 34 per cent to $45 million, as its margins were eroded by cut-throat local competition.

Pakistani operator Warid and PBTL in Bangladesh continued to be in the red, with respective pre-tax losses of $14 million and $5 million.

The only strong performer among SingTel’s six regional associates was Thailand’s AIS. Its pre-tax profit contribution rose 18.6 per cent to $68 million during the quarter.

Stronger earnings from Singapore and Australian unit Optus helped cushion SingTel against a more drastic decline.

‘The Singapore and Australia businesses turned in strong performances, especially in mobile with both reporting double-digit revenue growth,’ Ms Chua said. ‘However, competition in the emerging markets led to lower earnings from Bharti, Globe and Telkomsel, as they responded to competition to protect longer-term market share.’

Optus, which accounts for 30 per cent of SingTel’s Ebitda, enjoyed a strong quarter, with its net profit climbing 32.7 per cent to $208 million.

Net income from Singapore operations rose 9.8 per cent to $372 million on the back of improvements across SingTel’s telecommunications, IT and engineering businesses.

SingTel’s forecasts for its current financial year remain unchanged from guidance issued in May.

Operating revenue is expected to grow at mid single-digit level, while Ebitda is projected to drop slightly.

SingTel’s counter closed seven cents lower at $2.99 yesterday.

Overseas weakness

• In line; maintain Underperform. 1QFY11 core net profit was in line with our expectation but below consensus, with variances of -3% and -7% respectively when annualised. SingTel Singapore’s contribution was stronger qoq on higher margins. There was seasonal weakness at Optus. Associate contributions were weaker due to Bharti (Zain Africa dilution and financing costs) and Globe (stiff competition).

SingTel has kept its guidance but lowered Telkomsel’s revenue growth from high single digits to mid-single digits, which does not surprise us. We maintain our UNDERPERFORM rating, earnings forecasts and SOP-based target price of S$3.00 as the results reinforce our view that SingTel’s performance this year will be muted. Likely de-rating catalysts are further negative earnings surprises, weaker margins in Singapore on higher content costs and lower associate contributions because of Bharti’s earnings dilution.

• Stronger EBITDA in Singapore. SingTel’s revenue declined 7% qoq owing to lower contributions from its lumpy and low-margin IT and Engineering Services. EBITDA margins rose 3.6% pts qoq on lower contributions from IT and Engineering.

• Seasonal weakness in Australia. Optus’s revenue inched up 1% qoq but EBITDA margins fell 2.8% pts because of seasonal weakness.

• Weaker associates. Associate contributions were weaker due to: 1) Bharti, which was diluted by Zain Africa losses and financing costs. Going forward, we expect Zain’s losses to dilute Bharti’s earnings further as Zain only contributed 23 days to 1QFY11 results; and 2) Globe on stiff competition. Revenue was affected by the popularity of bundled services and unlimited offerings. Telkomsel lowered guidance from high-single-digit revenue growth to mid-single-digit, which does not surprise us.

Easing Fair Value to S$3.34

1Q11 results mostly in line. SingTel released its 1Q11 results this morning, with revenue up 11.5% YoY at S$4289.0m; but revenue fell 4.1% QoQ and was also about 3.8% below our estimate, mainly hit by seasonally lower IT and Engineering revenue from NCS and a weaker AUD QoQ. Net profit eased 0.2% YoY to S$943.2m; however, it fell 7.1% QoQ, again due mainly to seasonal factors and lower associate contributions (down 17.8% YoY and 6.9% QoQ); but it was just 1.6% shy of our forecast, as overall EBITDA margin was relatively steady at 29.3%, versus 29.9% in both 1Q10 and 4Q10.

Review of Singapore operations. Mobile revenue grew 13.7% YoY and 3.6% QoQ, driven by increased overseas travel and tourist arrivals; monthly blended APRU also increased further to S$53, up from S$51 in 4Q10, thanks to strong demand for smartphones and higher mobile data usage. While NCS contribution was down 29% QoQ (+6.1% YoY), SingTelalludes to revenue recovery given several major contracts that NCS has won recently. More details were also given for its mio TV segment, which saw a 15% QoQ jump in subscribers to 220k, fuelled by the World Cup and BPL offers; estimated ARPU came in ~S$63.6 but this may have been boosted by one-off World Cup pricing. Overall operational EBITDA margin came in at 38.2%; but it is keeping its 35% guidance for FY11 due to an expected hike in content cost from BPL and NBN initiatives.

Review of Optus and associates. Overall operating revenue grew 2.6% YoY (+1.0% QoQ), driven largely by its mobile business, which rose 6.7% YoY (+1.9% QoQ); it now contributes around 63% versus 60.7% a year ago. Overall EBITDA margin inched up to 24.5% from 23.0% in 1Q10 but still lower than 27.3% in 4Q10 due to seasonality. For the rest of FY11, SingTel has also kept its guidance unchanged.

Associates’ contribution fell 17.8% YoY and 6.9% QoQ; SingTel has kept its guidance largely unchanged except that it now expects Telkomsel’s operating revenue to grow at single-digit (versus high single-digit previously).

Easing fair value to S$3.34. In view of the likely lower associate contribution, we pare our FY11F earnings by 10.3% (FY11F by 6.5%). Although our valuations for its Singapore and Australia businesses are largely unchanged, the softer outlook for both Telkomsel and Bharti will reduce our SOTP fair value from S$3.40 to S$3.34. But as the total return is still over 10%, we maintain our BUY rating.