SGX Yield Stock

Fat dividend caps robust SingTel quarter

Strong performance across the group boosts fourth quarter earnings by 12.4%

Singapore Telecommunications is rewarding shareholders with its highest dividend payout in two years after posting a better-than-expected 12.4 per cent increase in fourth-quarter net profit to $1.02 billion.

Southeast Asia’s largest telecom operator yesterday said a combination of favourable currency movements and stronger contributions from regional associates helped reverse the steep 17 per cent bottom- line decline it suffered in the same period last year.

SingTel’s fourth-quarter net income of $1.02 billion was higher than the $987 million average forecast of five analysts polled by Reuters.

The improvement was driven by strong performance across the group, SingTel group CEO Chua Sock Khoong told reporters at the telco’s results briefing yesterday.

Earnings per share for the three months ended March 31 was 6.38 cents, up 12.3 per cent from 5.68 cents in 2009. Revenue for the period climbed 25.4 per cent to $4.5 billion.

For its improved scorecard, SingTel is proposing a final dividend of 8 cents per share.

This brings its full-year payout to around $2.26 billion, or 14.2 cents per share. This is its biggest distribution since 2007 when it returned more cash to shareholders through a special payout.

For the last two years, the operator has been paying 12.5 cents per share. It paid 11 cents per share in 2007, excluding a 9.5 cent special payout.

SingTel, which derives 73 per cent of its Ebitda (earnings before interest, taxes, depreciation and amortisation) from overseas, saw pre-tax contributions from its six regional associates grow 11.7 per cent in the fourth quarter to $546 million.

The truce in Indonesia’s telco sector made Telkomsel the star performer in the fourth quarter, with its contributions rising 25.8 per cent to $205 million.

Share of profit from Indian operator Bharti, SingTel’s largest overseas investment, grew 8.6 per cent to $245 million, while contributions from Thailand’s AIS rose 4.6 per cent to $53 million.

Globe’s contribution fell 22.5 per cent in Q4 due to the double whammy of heightened competition and thinner margins as a result of more attractive mobile bundles.

SingTel’s remaining associates – Pakistani operator Warid and PBTL in Bangladesh – continue to be in the red with pre-tax losses of $14 million and $3 million respectively.

According to Lim Chuan Poh, CEO of SingTel International, the group is currently ‘exploring’ opportunities for consolidation in the Pakistani telco sector.

‘For Bangladesh, the potential exists for us to now be able to do something together with Bharti,’ he added.

This is because Bharti bought a 70 per cent stake in Warid Telecom, Bangladesh’s fourth-largest mobile operator, earlier this year and it could potentially derive cost efficiencies by working with SingTel’s local outfit PBTL.

‘Tower sharing and site sharing and all that will be the first path,’ SingTel group CFO Jeann Low added.

Optus, which accounts for 34 per cent of SingTel’s Ebitda, saw its net profit soar 43.6 per cent to $279 million in the fourth quarter due to the strengthening of the Australian dollar and a recent mobile subscriber boom.

Net profit for SingTel’s Singapore operations fell 16.8 per cent to $341 million in Q4 due to a higher mix of lower-margin IT and engineering revenue, as well as the costs of cellular network upgrades and pay-TV content acquisition.

For the full year, SingTel’s net income rose 13.3 per cent to $3.9 billion on the back of a 13 per cent revenue improvement to $16.9 billion.

Looking ahead to this financial year, SingTel warned that earnings from Singapore could fall as a result of incurring higher costs for supporting its mio TV rollout.

More and more Singaporeans are signing up for SingTel’s pay-television service after it scored the broadcast rights for the Barclays Premier League last year and this pushed its customer tally past the 200,000 mark last month.

Contributions from Bharti could also be lower due to the financing costs of its US$10 billion acquisition of the 15 South African mobile assets belonging to the Zain Group.

SingTel shares closed three cents lower at $2.97 yesterday.

We Remain Neutral

• Final dividend of 8 cents per share is 0.4 cent or 5% higher than we expected, which together with the 6.2 cents interim, translates to a 4.7% yield.

• This is not bad, but the lowest, albeit the most sustainable in the sector.

• Profit for Q4 ended Mar ’10 came to $1,015 mln, up 12.4% from a year ago. At the Underlying Profit basis, the increase was a more moderate 6.6% to $1,022 mln, bringing the total for the year ended March ’10 to $3,907 mln and $3,910 mln respectively.

• Payout ratio would be 57.8%, consistent with Sing Tel’s policy of paying out 40-60% of its profits.

• It’s essentially the same “story”: moderate growth in the mature Singapore and Australia (through Optus) markets, and contributions from the regional associates, although the 32% owned Bharti witnessed its first quarterly profit decline of 8.2% in the March ’10 quarter (reported 2 weeks ago), reflecting the cut-throat competition in the mobile market in India.

• And our stance remains Neutral.

Results are secondary, watch the rising risks in India

• In line. SingTel’s FY10 core net profit was exactly in line with both CIMB and consensus estimates. It declared final DPS of 8 cts to total 14.2cts or 58% payout, slightly ahead of our forecast but within its policy of 40-60%. The results are characterised by a higher mix of IT and Engineering revenue in Singapore, offset by seasonal weaknesses in their mobile divisions. Associate contribution declined mainly because of Telkomsel. Maintain our forecast, UNDERPERFORM recommendation with a SOP-based target price of S$3.30 for now pending its conference call later this morning. No surprises from SingTel’s FY11 guidance. We see downside to our target price, mainly stemming from Telkomsel and Bharti. Likely factors to depress share price are rising content costs in Singapore, regulatory risks in India and earnings dilution from Bharti’s acquisition of Zain Africa.

• Normal seasonal weakness. Revenue was flat qoq reflecting the seasonal weakness in both consumer and business customers. Singapore’s revenue rose 7% qoq mainly on lumpy IT and engineering revenues, while that of Optus fell 3% qoq.

• Weaker associates. Associate contribution fell 5% qoq mainly because of a 14% decline in Telkomsel’s contribution. The Indonesian cellco was affected by competition in data and SMS and lost market share to Indosat and XL. Bharti’s performance was surprisingly resilient despite the cutthroat competition. However, the soaring 3G bids in India which crossed the US$3.2bn mark of more than four times the reserve price, new proposals by the Indian government that slaps more costs on spectrum and earnings dilution from Bharti’s acquisition of Zain Africa.

• No surprises from FY11 guidance. SingTel expects Singapore’s revenue to grow in the single digit yoy, but expects EBITDA to grow in the low to single range due to higher content and customer acquisition costs for mioTV. Optus expects to grow its revenue and EBITDA in the mid single-digit levels. SingTel expects Bharti’s earnings to be diluted from the financing costs for ain and the investment in 3G spectrum. We think there is downside risk to Telkomsel’s guidance of high single digit levels for its revenue growth, given its poor 1Q10.

Optus is the new reason

At a Glance

• Underlying profit of S$1022m beat consensus by 5%. Optus surprised with higher revenue and margins, led by the mobile segment

• 8 Scents final dividend in line, no special dividend

• FY11F guidance – S’pore EBITDA to decline low-to-mid single digit, Optus EBITDA to grow mid-single digit.

• Maintain BUY. For growth at Optus, Telkomsel & lower losses at Warid despite challenges at Bharti; TP S$3.40 based on SOTP valuation.

Comment on Results

Optus results significantly better than expectations due to benign competition. Optus’ net profit of A$220m (+14% yoy, +33% qoq) was ahead of our expectations. While 4Q is typically strong in margins after the festive promotion in 3Q, we did not expect the margin rebound to be so strong due to higher iPhone acquisition costs. Optus’s EBITDA margins of 27.3% (23% in 3Q10, 27.8% in 4Q09) resulted in 15% qoq rise in EBITDA. This is all the more impressive as Optus added 147k postpaid subscribers in the quarter, most likely increasing its market share.

Optus guidance for FY11 in line. Management guided for (i) midsingle digit growth in revenue and EBITDA (ii) Capex of A$1.2bn (A$1.05bn in FY10) and free cash flow above A$1.0bn (A$1.01bn in FY10). We have modeled EBITDA growth at 3.8% in FY11F.

Singapore results slightly lower than expectations. Singapore EBITDA margins came at 35.3% compared to our 36% estimate, due to higher selling & admin expenses (+24% yoy, +7% qoq). This can be attributed to higher content costs for mio TV and smart phone retention costs.

Singapore guidance for FY11F in line. Management guided for (i) mid-single digit revenue growth, but low-to-mid single digit decline in Singapore EBITDA (ii) Capex of S$830m (S$652m in FY10) and free cash flow around S$1.1bn (S$1.29bn in FY10). We have modeled 1.8% EBITDA decline in our forecasts.