Strong core ops. Strength was seen in the Singapore business, driven by mobile business and effective cost cutting measures (core earnings +32% YoY). Optus also did well, with earnings up 17% on the back of mobile strength. Group free cash flow for the quarter continues to be robust, growing by 5.2% to S$976m due to lower capex from both Singapore and Optus.
Forex in its favour. SingTel was hit by the strength in the S$ in FY09, but the trend is likely to reverse. In particular, we expect A$ to appreciate given the strength in commodities. We estimate that every 10% rise in A$ will result in a 2.3% boost in Group earnings.
Higher payout likely. Earlier this year, there were some concerns over Optus' NBN bid as winning it may be a drain on SingTel's financials. Now that the Australian government has decided to go on its own, the capex uncertainty is cleared which paves the way for higher payouts. This is reflected in the FY09 payout (58%), which came in at the higher end of the guidance (45-60%).
Earnings expected to inch up. We estimate earnings will rise 4.6% in FY10 to S$3.61b on the back of weaker S$ and stronger contributions from its regional associates. Its core Singapore and Australia businesses are also expected to be resilient in the face of the downturn. We forecast EBITDA will be flat for domestic operations, and rise 4.2% in S$ terms for Optus.
Target price raised, call upgraded. Based on SOTP, we derive a target price of S$3.02 (S$2.67 previously), which represents a capital upside of 10.2%. Coupled with a prospective yield of 4.8%, total return works out to 15%. Upgrade to BUY.
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