Singapore Telecommunications - Dialing up our recommendation (CIMB)

NEUTRAL Upgraded

S$2.95 Target: S$3.36

Mkt.Cap: S$47,022m/US$38,455m

Telecommunications - Integrated

1QFY12 results preview

With competitive pressures easing in India and Indonesia, we are upgrading SingTel to NEUTRAL from Underperform. Our SOP-based target price is raised from S$3.19 to S$3.36 after incorporating higher consensus targets for Bharti and AIS and taking into account the impact of the stronger A$ and S$ relative to regional currencies. We expect SingTel to report a 4% qoq and 10% yoy increase in 1QFY12 core net profit, with the strong profit contributions from SingTel Singapore, Telkomsel and AIS mitigated by the weaker results at Bharti. The company is scheduled to announce its results on 11 Aug. Our key concern for SingTel is the prospect of rising competition in Australia and the strengthening S$ which could dilute its overseas contributions.

The details

SingTel’s core earnings are expected to continue recovering from its 2QFY11 low. The company should report a modest 4% qoq and 10% yoy core net profit growth in 1QFY12, as shown in Figure 1 below. This is broadly in line with both our and consensus FY12 forecasts. We expect earnings growth to be driven by:

• seasonally higher margins in Singapore as the telco usually books in a larger share of expenses in the final quarter of its financial year.

• Telkomsel, where 2Q11 core net profit increased 9% qoq but was flat yoy. Telkomsel’s revenue rose 6% qoq and yoy, outpacing XL Axiata’s 1.8% qoq growth. We think Telkomsel benefited from rotational churns at the expense of its smaller rivals.

• Advanced Info Service, where 1Q11* core net profit rose rose 6% qoq and 20% yoy. This was driven by the strong growth in prepaid voice and data, thanks to its superior nationwide coverage.

*SingTel books in contributions from AIS with a one quarter lag.

We believe SingTel’s 1QFY12 performance was dragged down by Bharti, where core net profit fell 4% qoq and 30% yoy. This was due to the higher effective tax following the expiry of its tax holiday in India. However, we are positive on Bharti, and the Indian telco sector in general, after the larger players raised their tariffs recently indicating a less intense competitive environment.

The performance of the SGD was mixed during the quarter. The SGD depreciated against AUD and IDR by 3% and 1% respectively. It strengthened against the INR, THB and PHP by 3%, 2% and 2% respectively.

Valuation and recommendation

Raising target price. We raise our sum-of-parts (SOP)-based target price from S$3.19 to S$3.36 after:

• Raising Bharti’s and Globe’s valuations based on the latest consensus target prices.

• Raising AIS’s valuation from THB101/share to THB131 following our recent upgrade.

• Raising our assumption of the Aussie dollar exchange rate from S$1.08/A$ to S$1.28, but lowering the Indonesian rupiah rate from Rp6,500/S$ to Rp6,900 and Indian rupee rate from Rs33/S$ to Rs35.6/S$.

• Cutting our valuations for Warid Pakistan, Pacific Bangladesh Telecom Ltd (PBTL) and Far Eastone Telecom based on their carrying values on SingTel’s balance sheet.