SingTel - Upgrade to Buy: Many Moving Pieces Coming Together

Many moving pieces coming together — (1) 13%/10% EPS growth in FY10E/11E appears respectable vs. telco peers. (2) Low expectations given modest FY09 and sedate FY10 company guidance – we see upside risk in delivery. (3) Improving associates – Telkomsel on industry repair, Bharti/MTN a longer-term opportunity? (4) A reasonable valuation case. (5) Macro/political trends bode well for favourable currency movements (A$, INR, IDR). Based on these factors we upgrade our rating to Buy (from Hold), lower the risk rating to Low (from Medium) and revise our target price to S$3.30 (from S$2.70).

Singapore and Australia: Building up for longer term gain — Consistent revenue share gain in Singapore has come with EBITDA stability but margin cost. Higher scale/lower aggression could drive growth but are not in current expectations. Little growth in Optus is largely in expectations but we view nothing is reflected for NBN opportunities/mobile consolidation – potential longer term positives.

Associates: Sound growth — We see associate contributions rising 20%/23% in FY10E/11E as Telkomsel regains growth momentum into a healing wireless industry in Indonesia. A potential Bharti/MTN combination could bode well for LT value/earnings accretion, we would see more involvement as a LT positive.

Valuation/Currency trends in favor, estimates revised up — 1) P/E discount to market highest in a long time, 2) 4% discount to spot SOTP compares with a LT premium of 8.4%, 3) Stub at 10.4x P/E and 5.7x EV/EBITDA vs. LT mean of 12.4x and 6.7x respectively, 4) Currency trends in favor with 5% strength in A$, INR, IDR could add 4/5/2 cents to SOTP. 5) FY10E-11E EPS estimates up 3%-4% on stronger A$ and higher Telkomsel profits.

Risks — M&A overpayment seen as primary risk. Bharti/MTN deal progression could see short term weakness, presenting entry opportunities, in our view.

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