Singtel - Trades at a premium to its mark to market valuation

We have refreshed our SingTel earnings estimates, which has led to increases in our EPS for FY09E, FY10E and FY11E of 10.0%, 9.5% and 4.3%. Largely, these increases came from lower estimates of Optus’ depreciation expenses following the decline in the AUD/SGD. We also adjusted our 12- month SOTP price target down from S$2.67 to S$2.43. The biggest contributor to this decline was Bharti, of which we have suspended coverage. Previously, we valued it at our 15-Jan Bharti DCF valuation of Rs847/sh, but we are now valuing it at the 6-Mar closing price of Rs602.15/sh. This contributed S$0.22/sh of the S$0.24/sh fall in our price target. Our Neutral rating on SingTel remains unchanged.

We note that the SingTel share price appears to reflect what we believe is a liquidity premium. If we were to sum the market value of SingTel’s individual businesses, including applying a 6.6x EBITDA multiple to the Singapore operations in-line with StarHub’s (STAR.SI, on Conviction Buy list) current trading multiple, we would get only S$2.42/sh. At S$2.54, the market appears to be pricing in a 5% premium against what might be a reasonable expectation of a holding company discount.

Our 12-month SOTP price target capitalizes our estimates of the Singapore and Australian normalized FCF at a 13.4x multiple. We also use a mixture of market prices and target prices (where available) of SingTel’s associates before applying a 20% holding company discount to these assets.

The biggest risk to our valuation of SingTel would be a further decline in the value of its stake in Bharti. We believe that the resumption of strong growth leading to the perception of increasing value of SingTel’s stake in Telkomsel represents the biggest upside risk. Currency volatility, especially of the INR, AUD and IDR, could have either positive or negative effects.

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