Singtel - Recent news flow points to lower risks; reiterate Buy

We reiterate our Buy rating on SingTel following series of positive news flow over the past week that point to improvement in SingTel’s risk profile on the following fronts: (1) Optus NBN risk; (2) Telkomsel earnings; (3) Forex. SingTel’s stub (S’pore + Optus) valuations seem undemanding vs developed peers. Pot’l upside from Bharti, and 5% div. yield vs <3% govt. bond yield adds to the stock’s allure.

Telstra CEO’s announced departure by Jun 30 opens the door for Telstra to re-engage with the govt. on NBN, albeit from a weaker position. Improved odds for Telstra’s re-entry into the NBN discussions augur well for Optus’ capex profile. We expect Optus to support Telstra’s re-entry in talks with the govt. so long as NBN is open access & features structural separation. Our worst-case scenario estimates ~10% hit to SingTel’s valuation if Optus takes on the NBN.

Post easing of the tariff war in Indonesia, there are signs that subscribers are flowing back to incumbents. Recently announced 4Q CY08 revenues point to outperformance from Telkomsel (+12% QoQ) and Indosat (+3%) versus Excelcomindo (-11% QoQ). We expect this trend to continue for next 2 qtrs as balance sheet constraints may keep a check on the competitive environment while upcoming elections may allow for stable regulations esp. on interconnection.

SingTel’s earnings have ~55% exposure to A$, Rupee & Rupiah. These currencies have declined by 6-30% vs S$ over past 2 qtrs. Looking ahead, BAS-ML sees scope for a weaker S$ vs US$. This could cushion the FX hit to SingTel earnings. Our FY10E FX assumptions for SingTel are up to 5% below spot.

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