Singtel - Financial discipline across the group

Management highlighted that macro challenges and the NBN (National Broadband Network) rollout are the key uncertainties both in Singapore and Australia. It acknowledged that the operating landscape could change over the next three to five years, with the imminent fibre rollout in various countries. The operators could just become bit-pipe providers if there isn’t a dedicated push to diversify businesses. It stated that the way to differentiate and retain customers is to use brand reputation and venture into adjacent markets like media / IT services. SingTel is now one of the largest regional IT / managed services businesses and also aims to become a large multi-media provider over time. The launch of http://www.insing.com/ (a local Singapore search engine) is an example. Other incumbents like Telstra or Telecom NZ have also highlighted similar aspirations.
The company has and will continue to differentiate itself in the following ways:
1. Strong execution focus and continuing to deliver differentiation;
2. Financial discipline across the group. This not only applies to acquisitions, but also for capital investments across various businesses; and
3. Deriving synergies by leveraging group scale (combined 250mn mobile subs). These include central equipment sourcing functions and exchanging management and operational expertise.
The company highlighted the iPhone as an example of being able to negotiate on a group basis. In Australia, for example, Telstra, Optus and Vodafone Australia all provide iPhones. Telstra was able to secure a deal being the largest carrier in Australia; and Vodafone was able to leverage off its global scale. Similarly, SingTel/Optus also negotiated it on the combined-group basis, and the company now estimates its share of net adds in Australia is around 50%.

We maintain our BUY rating with a S$3.15 price target. The stock is up 7% since the last results on 14 May, 2009, and has outperformed its domestic peers. However, all three telcos have underperformed the local market since the beginning of the year. If broader markets do recover from here onwards, it is likely that developed market telcos could under-perform on a relative basis. However, if markets are volatile, we think SingTel remains a strong defensive play – it generates in excess of S$3bn in free cashflows pa from various markets.

With the recent announcement of a possible merger of Bharti (BHARTI IN, INR805, BUY) and MTN (MTNJ J, ZAR120, BUY), there is some uncertainty around the earnings / cashflow impact on SingTel in the near term. We note that while SingTel’s stake in Bharti could be diluted to around 19.4% (from 30.4% now) as per the current deal terms, the risk to medium-term earnings and cash contributions remains to the upside, owing to a solid operational outlook for both Bharti and MTN. The final deal structure and terms are yet to be determined — it is quite possible that SingTel could become directly involved in the deal by taking a stake in MTN, which could preserve its current Bharti stake or offset the dilution.

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