Singtel - The Indian Connection

Bloomberg reported that Bharti Airtel (India’s biggest mobile phone company with 102.4 subscribers, of which quarterly record of 8.44 mln was added in Q2) and MTN (South Africa’s biggest wireless company) have reached a US$24 bln preliminary accord to buy each other’s shares, as a first step leading to a merger.

Bharti is to buy 49% of MTN for US$14 bln, while MTN will acquire 33% of Bharti for US$10 bln. If consummated (which requires 75% approval by shareholders of MTN), the deal will:

- create the world’s biggest mobile phone company with 200 mln subscribers and US$20 bln annual revenue;

- will dilute Sing Tel’s existing 30% stake in Bharti. (Sing Tel has said it was prepared to invest a further US$3 bln by buying more Bharti shares from minority shareholders of MTN receiving Bharti shares, to maintain the stake.)

The proposed merger between Bharti and MTN was first announced on May 25th, with Bharti offering 86 rand plus half a Bharti share for every MTN share. Yesterday, MTN closed at 127 rand and Bharti at 409.35 rupees. Bharti’s latest offer values MTN at 145 rand per share. (Bharti is generally believed to be anxious to merge with MTN given the rapid inroads into its market by Vodafone and Reliance.)

We remain Neutral on Sing Tel, which has no particularly attractive atrribute:

Sing Tel’s main attraction is its defensiveness, which is not appealing in current bullish market environment.

The 3.9% yield at $3.17 based on 12.5 cents paid for ye Mar ’09 is only average.

And as has been our stance all along, Bharti, AIS of Thailand, Globe Telecom of Philippines, Telkomsel of Indonesia are mere portfolio investments of Sing Tel, no basis for re-rating of the stock. (Note results comments have tended to focus on contributions from associates, which in turn are often subject to currency fluctuations.)

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Singtel - Higher Bharti-MTN Involvement?

Higher Bharti-MTN involvement likely? — We think the 30th September extension to the Bharti-MTN exclusivity negotiation window raises the deal probability. Perceptions like MTN shareholders (SH) wanting a higher price, and potential regulatory/technical on a Bharti GDR are rising, and SingTel’s direct and higher involvement could help.

How could SingTel get involved? — (1) Commit as buyer of Bharti GDR to be listed on JSE at a fixed price to those not wanting it, hence crystallising all cash offer – more attractive to MTN SH?; 2) Bharti makes preferential allotment of shares to SingTel first for cash and then improves offer to MTN SH to all-cash. Regulatory approvals/exemptions needed but not insurmountable.

How much could SingTel invest? — “Stock” portion of deal is US$5.7bn (S$8.2bn) per current terms, a ceiling to SingTel’s involvement, we think. A 1.8x net debt/EBITDA implies S$3.1bn of borrowing capacity, inadequate if SingTel goes all the way. Equity raising/value for price fears could then dominate in the short-term.

Longer term positive for SingTel though — Locking in longer term growth potential should enhance SingTel’s “growth and yield” attraction. Our analysis suggests accounting for Bharti-MTN cross-holdings (vs. headline workings) is deal EPS accretive to Bharti now, but EPS neutral to a 16% higher cash offer.

Our view on Bharti-MTN outcomes and probability — (1) Bharti walks away: 10% probability; (2) Deal announced with small changes to current terms: 30%; (3) Materially higher (all-cash?) offer with significant help from SingTel: 50%; (4) Bharti goes alone with significantly higher cash offer: 10%.

SingTel - reported better than expected results

Profit margin. Net profit margin decreased from 25.3% in 4Q FY2008 to 24.6% in 1Q FY2009. This was due to the increase in operating expenses mainly from the inclusion of Singapore Computer Systems (SCS) in its financial statements.

Merger between Bharti and MTN. Currently, Bharti and South Africa’s largest telecommunications company, MTN, are in discussions and the agreement extends up to 31 August 2009. During the briefing, SingTel has declined to disclose details about the transaction. Currently, SingTel has a 30.4% equity interest in Bharti. We believe that SingTel will try to increase its stake in Bharti to avoid any dilution in interests if the merger is successful.

Listing of NCS. SingTel has acquired SCS and include it as part of NCS. We believe that there is a possibility that SingTel may list NCS after it has reorganised the operations of NCS. This will enable SingTel to raise funds that may be used to increase its stakes in the regional mobile associates, for future acquisitions or distribution as dividends to shareholders.

FY2010F Outlook. The company expects the operating revenue for the Singapore and Australian businesses to grow at single-digit level and low single-digit level respectively. Moreover, among its regional mobile associates, Bharti and Telkomsel are likely to see growth in earnings. Nevertheless, the contributions from the regional mobile associates are likely to be affected by the depreciation in the regional currencies.

Maintain BUY recommendation and target price at S$3.80. We rate SingTel as buy and maintain the target price at S$3.80 because of its good financial performance. Furthermore, SingTel has highlighted that the worst is over and it is monitoring the recovery of its operations. In fact, we continue to like SingTel as it has established operations in Singapore and Australia as well as strong profit contributions from its regional mobile associates.

SingTel: Potential good news priced in

Good results from forex gains. We expect SingTel to report 1Q10F net underlying earnings of S$980m (+13% yoy, +2% qoq) on 13th Aug, ahead of consensus estimates of S$920m-S$930m. Last year, exchange rate losses exacerbated SingTel’s earnings but FY10F should be a recovery year. Based on quarterly results posted by Bharti and half yearly results posted by PT Telkom, we estimate that mark-to-market gains from these two associates in 1Q10F to be about S$60m. Besides, associates from Pakistan and Bangladesh may also report foreign exchange gains. In view of the forex gains and better performance of Telkomsel, we raised SingTel FY10F earnings by 2%, which are 4% ahead of consensus now.

Trading above the regional valuations. At 8.7x EV/EBITDA, and 14.5x FY10F PER, SingTel is trading above the regional EV/EBITDA of 5.5x and PER of 14.4x. Three key changes in our SOTP valuation are (i) DCF valuation of the core business (Sing-Optus) are based on lower WACC of 8.5% instead of 9.5% earlier, implying core FY10F PER of 14x vs 12x earlier. (ii) Telkomsel target price at 15x PER rolled over to 2010 from 2009 earlier. (iii) Higher target price for AIS.

Potentially higher stake in Bharti? Aggressive network expansion plans of new players such as Telenor and Sistema in the next 12 months may restrict Bharti’s earnings growth to single-digit from next year onwards. As such, acquiring more stake at 9x Bharti’s FY10F EV/EBITDA and 15.5x FY10F PER may not be a significant catalyst for SingTel.

Singtel - This is it – for core premium

Share price movements over the past month (SingTel: +14%; Bharti: +4%; PT Telkom: +14%) translate to the core business trading at 20% premium to our fair value estimate. We retain our Neutral rating but highlight our preference for StarHub (-1% over past month) in the Singapore telecom space.

Recent Singapore news flow– positive but not significant: M1’s results suggest stabilisation of cyclical components of revenues and augur well for all players. Launch of iPhone 3GS is mildly positive for defending revenues.

Bharti's result on 23 July the near-term focus: Aside from results (forecast profit +23% YoY), focus is on any MTN deal commentary. We see potential Bharti-MTN deal as a negative for SingTel due to the complex shareholding structure (ie, SingTel's discount to parts should expand, in our view).

Core premium now at 20%: Implied core FY10E PER of 14.1x (historical average of 12.9x) is not compelling to us. Core (Sing/Optus) business, at 20% premium to our fair value estimate, is at the high of its historical trading range. 12-month price target: S$2.90 based on a Sum of Parts methodology.

Singtel - Bharti's 1QFY10 disappoints

SingTel’s 30.4% Indian associate, Bharti, reported 1QFY10 results, that were below both ours and consensus expectations. Core net profit of Rs 22.7bn (+3.4% yoy; - 8.0% qoq) made up 21% and 23% of ours and consensus full year forecast respectively. The key reason for the miss was the lower revenue arising from lower mobile termination charge (MTC) or interconnect rates, dropping from Rs0.30/min to Rs 0.20.

Slowing growth momentum. Excluding the adverse impact of Rs 3.6bn from MTC, revenue would have expanded 21% yoy and 5% qoq. This, however, is still a far cry from the 40-60% yoy growth seen in the past. We attribute this to the impact of competition, a larger revenue base and the longer time needed for rural users to increase usage. Bharti guided that ARPUs would have been Rs 12 higher or Rs 290 (- 5% qoq drop) in 1QFY10 without the effects of MTC while average revenue per minute (ARPM) would have trended up to ~Rs0.61/min from the reported Rs0.58/min.

ARPM has also been lower due to the effect of the rural drive, the free minutes arbitrage from the more rent-seeking element of its customer base and the strategic balance between usage and rates that Bharti is trying to maintain. EBITDA margins were resilient. The MTC flattered EBITDA margins which improved 1.1% pts qoq and 0.3% pts yoy as it lowered access charges by 20% on a qoq basis. Excluding MTC, mobile margins would have risen by 0.5% pts on a qoq basis from 31.5% to 32% from the reported 33% while enterprise margins would have trended up by only 0.7% pts to 46.6% in 1Q on a qoq basis from the reported 49.1%. Bharti is also concentrated on cost efficiencies particularly in network cost and is also looking to optimise its sales and distribution cost.

Downgrade to UNDERPERFORM. Following SingTel’s stellar share price performance which has shot past our SOP-based target price of S$3.20, we are downgrading our recommendation to UNDERPERFORM.

Newsflow turning negative. In addition to the disappointing results by Bharti, we believe newsflow from India could be increasingly negative where the cost of 3G spectrum could be surprise on the upside given its scarcity. While we are mildly positive on Bharti’s proposed merger with MTN, the market appears to be more cautious. We expect more newflow on this in the coming weeks, which could be negative on SingTel’s share price.

Rich valuations. Lastly, the implied 12-month forward rolling P/E of SingTel Singapore and Optus have surged to 17x, as illustrated in Figure 2 below. This is derived from subtracting SingTel’s market capitalisation from the sum of all its listed associates, and dividing the residual value with SingTel Singapore and Optus’s projected earnings. Except for Telkomsel (though Telkom Indonesia), SingTel’s associates have not re-rated significantly in the last few months, despite the strength in SingTel’s share price.

Singapore Telecoms - Defensive with growth potential

Targeting wider football audience. SingTel recently unveiled its pricing plans for the upcoming UEFA Champions League, Europa League and Serie A matches next season. Offered via three platforms - on mioTV, online and on mobile, the sign-ups will cost S$15.90/month for access to all three platforms for its subscribers; it also has separate plans for individual platforms should subscribers opt not to take up the all-in-one package. And it has not forgotten about non-subscribers - they can pay S$13/month to watch these matches online or just S$6 per live match. We think the multi-platform approach is great as it enables SingTel to tap the whole market of football fans - well beyond its current mioTV subscriber base of 100k.

Defensive earnings still matter. On the economic front, there are increasing signs that the global recession has probably past its worst point, but the consensus is that the pace of the economic recovery is still expected to remain splotchy. As such, there could still be several quarters of uncertain corporate earnings for most companies. On the other hand, SingTel's suite of services is likely to remain quite resilient as consumers nowadays have deemed them to be near-essential or even a necessity. SingTel itself has guided for stable FY10 performance, with both Singapore and Australia turning in low single-digit revenue growth.

Growth potential from regional associates. Should there be a fasterthan- expected pick up in the economic recovery, we believe that emerging markets in Asia would be the ones who will benefit the most. We further believe that this would translate into faster growth for SingTel's regional associates, effectively adding a "recovery angle" to its investment thesis. Another potential positive would be associate Bharti's much-talked about merger with South Africa's MTN; this would allow SingTel to extend its reach beyond Asia and with well-established partners. Other catalysts would include possible M&As in the region.

Raising fair value to S$3.49. On the recent leadership change at rival StarHub, we do not believe it will affect SingTel much - while it is the de facto leader in the Singapore market, its importance is likely softened by its potential regional expansion. In light of the firmer regional currencies, we have bumped up our FY10 and FY11 estimates slightly; the recent rebound in the global stock markets has also increased our SOTP fair value from S$3.18 to S$3.49. Coupled with an expected 3.9% dividend yield for this year, we maintain our BUY rating.

Singtel - Speedier iPhone off to fast start

The iPhone 3GS was launched last Friday and will run until today. We understand that the pre-launch response is comparable to the 3G launch in Aug 2008, with “several thousand” orders placed online between 6th and 9th July and customers still clamoring to place orders even after the pre-ordering closed. A new Lite price plan has been added, with a $39 monthly fee (vs $56 for the cheapest plan when 3G was launched).

Assuming most new users will take up the cheapest plan, we estimate handset subsidies will be significantly lower this time round, e.g. $150 for the 16GB 3GS model vs $505 for the 16GB 3G model, as Apple has cut the price by US$100 but SingTel is actually charging more for the 3GS model ($548) compared to the 3G model ($508). However, it is a trade-off as the monthly fee for the cheapest plan is also lower than before.

Typically, carrier margins would be hit if iPhones outsell other handsets as subscriber acquisition costs would soar in the product launch quarter, and contrary to expectations, worldwide demand for iPhone 3GS has not waned. Apple reported 1 million sets sold in the first weekend, the same as 3G. However, due to the estimated lower subsidy, we expect SingTel to maintain its FY10 EBITDA margin guidance of 36-38% when it reports 1Q10 results, which we reckon has already considered the new iPhone, and there may be upside if the economy improves further, unless content costs run out of control.

On the M&A front, Bharti is expected to complete its due diligence on MTN by end-July. The deal is reported to have the support of the Indian government. In addition, the Australian dollar andIndonesian rupiah have continued to strengthen in 1Q10. Optus and Telkomsel contribute about 15% and 18% of SingTel’s pretax profit, respectively.

We have updated our SOTP model incorporating our latest forecasts and market values for the listed associates, and derived a SOTP value of $3.35. Hence, we maintain our BUY recommendation.

Singapore Telecom: Opportunity to redeploy capital?

Opportunities to free up capital in Singapore and Australia. We believe SingTel has multiple alternatives in Australia - to sell Optus' fixed network and/or list Optus on the stock exchange, which is more stable now as a result of healthier competitive environment post Hutch-Vodafone merger. We believe that SingTel also has an option of spinning off its IT subsidiary, NCS and re-list on the stock exchange in the long term. We assign higher probability to the sale of Optus fixed line network in the near term. We estimate that the potential sale of Optus fixed Network, listing of Optus and NCS can free up over S$1.5 bn, S$6-8 bn and over S$1 bn of capital respectively. If freed up capital can be redeployed in better opportunities, the stock may warrant re-rating.

Strategic rationale for higher investment in Bharti. SingTel may not want to see its stake diluted in Bharti post Bharti-MTN deal. This would require S$5-6b investment from SingTel and provide investors an exposure to the emerging markets of Africa, through tried and tested partner Bharti. We believe that Bharti can further enhance MTN's profitability, by transferring its "minutes factory" business model.

Recovering Telkomsel leads to 2% revision in FY10F earnings. Recently, Excelcom has taken-off its super off-peak free on-net call offerings while Telkomsel has extended the number of chargeable minutes during peak hourcall. As such, we believe that pricing downtrend is set to reverse in Indonesia.

Surging regional currencies lead to another 2% revision. Since our last SingTel update on 15 May, Aussie dollar, Indian rupee and Indonesian rupiah have strengthened 2-4% versus Singapore dollar.

We expect Bharti and Telkomsel to drive Singtel earnings growth

While we believe SingTel faces challenges in Singapore with the upcoming Next Generation National Broadband Network (NBN), we are positive on SingTel’s associates, Bharti Airtel (Bharti) in India and Telkomsel in Indonesia. We expect these associates to drive a 9% net profit CAGR for SingTel for the next five years.

In mid-2008, the A$, Rp, and Rs depreciated significantly versus the S$, pressuring SingTel’s YoY earnings trend as contributions from overseas associates became smaller in S$ terms. We think the YoY comparisons should no longer be a concern from mid-2009, as the A$, Rp, and Rs have now appreciated versus the S$.

Over the past three months, SingTel has been the worst performing large-cap stock in Singapore. SingTel underperformed the Straits Times Index (STI) by 26% as investors focused on high beta names. We believe the period of SingTel’s underperformance may largely be over as currency risks are subsiding.

Reflecting Bharti and Telkomsel earnings upgrades and recent currency moves, we raise our SingTel FY2010/11E EPS from S$0.237/0.252 to S$0.244/0.268. We also raise our price target from S$2.94 to S$3.38. SingTel’s 12-month forward PE is at 11.9x, and the implied 12-month forward EV/EBITDA multiple for SingTel’s Singapore and Australia businesses is 5.1x. These are below the five-year historical average of 12.7x PE and 6.0x EV/EBITDA.

Singtel - Maintain BUY recommendation and target price at S$3.80

FY2009 Results. SingTel reported FY2009 operating revenue of S$14,934m (+0.6% yoy) and net profit of S$3,448m (-12.9% yoy). Although its Singapore and Australian operations posted revenue increases of 13.1% and 7.2% respectively, overall revenue only rose slightly by 0.6% mainly because of the 11.9% decline of the Australian dollar against the Singapore dollar. Its Singapore operations continued to have growth in its data, mobile and IT segments. In Australia, it managed to attract 652,000 new mobile customers and 143,000 new Internet customers.

Furthermore, net profit fell as the share of results from the regional associates decreased by 19.8% to S$2,051m. The weaker performances of the associates were due to the depreciation of the regional currencies and the poor performances by Telkomsel, Globe and AIS.

Dividend. SingTel announced a final dividend of 6.9 cents per share. Together with the interim dividend of 5.6 cents per share, the total dividend is 12.5 cents per share for FY2009. The dividend amount was the same as FY2008.

Profit margin. Net profit margin increased from 21.6% in 3Q FY2008 to 25.3% in 4Q FY2008 mainly due to better performances from its Singapore and Australian operations as well as its regional mobile associates. Based on a year-on-year comparison, it fell from 26.7% in FY2007 to 23.1% in FY2008 because of the negative impact from the economic downturn and the depreciation of the foreign currencies.

The actual revenue and net profit were 1.1% below and 3.6% above our forecasts respectively. Revenue was slightly lower because of the greater than expected depreciation of the Australian dollar. Net profit was higher as the earnings of the regional mobile associates came in above our forecasts.

FY2010F Outlook. The company expects the operating revenue for the Singapore and Australian businesses to grow at single-digit level and low single-digit level respectively. Moreover, the contributions from the regional mobile associates are likely to be affected by the fluctuations in the regional currencies. Its dividend policy is to pay 45% to 60% of underlying earnings.

Maintain BUY recommendation and target price at S$3.80. As the revenue and net profit of SingTel came in close to our expectations, we maintain our target price of S$3.80 based on the discounted cash flow method. SingTel remains a buy as its business continues to grow in Singapore and Australia with profit contributions from its regional mobile associates.

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.

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.

Singtel - Merely a passenger in the Bharti-MTN transaction - valuation impact minimal

Bharti is currently undergeared and the US$4.0 bn net cash outflow from the transaction drives the net debt to unconsolidated EBITDA to 1.4x; still comfortable. Therefore, Bharti does not require financial assistance from SingTel to complete the transaction. SingTel confirmed it is not directly involved in the transaction and will not, therefore, contribute any cash or issue shares as a result of the deal.

As a result of the equity issuance, SingTel’s effective stake in Bharti would decline from the current 30.7% to only 19.6% of the enlarged, merged business. Bharti is already equity accounted anyway, so no deconsolidation is required. Furthermore, at the “entry price” being paid by Bharti on the current terms (14x P/E and 5.4x EV/EBITDA) the dilution to Bharti’s EPS would be limited to only 2.3%. SingTel’s management has not yet been able to inform us of the impact on SingTel’s shareholder rights (and veto powers) following the transaction (and the resulting stake dilution).

Thus, the prima face impact on SingTel will simply be felt through the valuation impact of the transaction on Bharti. Given the share-for- share exchange, the valuation impact on Bharti is complicated. But taking the closing prices of the two shares on Friday 22 May, it appears US$3.8 bn in value would be transferred from Bharti shareholders to MTN shareholders as a result of the deal. This can be thought of as a control premium (equivalent to a 14.3% premium to MTN’s closing price).

SingTel’s share of US$3.8bn in “value destruction” in Bharti would equate to S$0.11/share in value destruction at SingTel, or 3.3% of our current target price of S$3.34/share.

On the other hand, the US$3.8 bn in assumed value destruction is based on the deal terms at the closing market prices on Friday. It takes no account of potential synergies (either on procurement of operating/’back office’ costs), although we are not a big believer in either cost/revenue synergies from international acquisitions. What will probably be of far greater importance in the medium-to-long term will be MTN’s operational performance and the currencies/macro environment in Africa and the Middle East. On 4 March, our MTN analyst cut his MTN target price 38.7%, from ZAR150 to ZAR92 on currency and macro weakness. Should this prove short-lived, Bharti might destroy less than US$3.8 bn in value.

SingTel: Possible 4Q09 earnings surprise

Upbeat 4Q09 results likely. SingTel is due to report its 4Q09 results on 14 May before market opens. We had earlier expected revenue to show a modest QoQ decline (<5%) as we expect the economic slowdown to exert a slight toil on its business; the weaker AUD is also expected to negatively impact its consolidated revenue. But based on the relatively upbeat quarterly results from its peers MobileOne and StarHub recently, as well as the strong 4Q09 results from 33%-owned associate Bharti Airtel, we may see better- than-expected showing from SingTel. Another area of earnings surprise could also come from forex gains, as the regional currencies have appreciated some 2-5% against the SGD over the quarter.

Systems are go for NBN. Separately, the Infocomm Development Authority (IDA) recently announced the successful achievement of the contractual and financial close (CFC) by OpenNet, the NetCo of the NBN (national broadband network). SingTel has a 30% stake in OpenNet. As such, OpenNet has now obtained its Facilities-Based Operator License for it to commence the roll out of the NBN, where the plan is to achieve 60% coverage of all residential premises and non-residential buildings by end-2010, and 95% of all residential premises and non-residential buildings by 2012.

Divestment of SingTel's underground assets. The IDA has also approved OpeNet's implementation plan of the AssetCo, which will be established as a business trust within 24 months of the CFC, and will own and control the relevant underlying passive infrastructure assets that are used to support OpenNet's deployment. SingTel will transfer these underlying assets to the AssetCo; it will also need to reduce its unit holdings in the AssetCo to less than 25% within 60 months of OpenNet's CFC. We view the move positively as it would allow SingTel to monetize its assets.

Room for upward revision. In line with the recovering equity markets around the globe, we note that share prices of its listed associates have also risen over the quarter, with Bharti up as much as 16%. However, we are still not entirely convinced that a sustainable recovery has taken place, as the economic fundamentals continue to lag the sharp rally in share prices. Still, should the global economic recovery come earlier and stronger than expected, we see room to raise our FY10 estimates. For now, we maintain our SOTP fair value of S$3.09 until we see the 4Q09 results. In the meantime, we retain our BUY call.

New iPhone to reach Singapore next month

A speedier version of the Apple iPhone will be docked at Singapore Telecommunications stores from July. As reported by BT on Monday, the Republic's largest operator scored a multi-year distribution deal with Apple that extends to both existing models as well as the impending upgrade. While the Apple-SingTel pact is not contractually exclusive, the gadget maker's strategy of using only one reseller in most countries means SingTel will retain its iPhone monopoly till 2010 at least.

Pricing remains unchanged from last year, with US operator AT&T charging US$199 for the new 16 GB (gigabyte) model and US$299 for the 32GB version. The company's existing 8GB iPhone 3G will continue to be sold but at a lower price of US$99.

Video recording, a feature found in most phones, will finally be supported in the iPhone 3GS, along with voice control and the ability to use the handset as a wireless modem for Web surfing. The phone's software will also be updated to allow users to send multimedia messages, copy and paste text and capture voice recordings. A SingTel spokesman said that current iPhone 3G customers can get this operating system upgrade for free from June 18.

SingTel: Denies fund raising rumours

Fund raising article "misleading"; Maintain BUY. We spoke to SingTel's spokesperson following a Bloomberg article suggesting that the telco was seeking US$4b in funds to "protect its stake in Bharti Airtel". He said that the article was "misleading" and "very wrong". The fact is that SingTel did engage a financial adviser, but it was for the purpose of assessing the potential merger between Bharti and South-Africa based MTN, and not specifically to look into fund raising. We estimate that Bharti would need US$4b for this deal, which will likely be in the form of debt financing. But even if it were to do equity fund raising, SingTel will be in a good position to support. Maintain BUY on SingTel, with price target of S$3.17 based on SOTP. Bharti accounts for 25% of our SOTP.

Recapping the deal. Bharti would acquire 49% shareholding in MTN, and MTN would in turn acquire a 36% stake in Bharti. The combined entity would create an operator with revenue of more than US$20b and combined customer base of 200m users. Both parties have agreed to discuss the potential transaction exclusively till 31 Jul 09, which if successful, will make it the world's third largest mobile phone company. The deal prices Bharti at EV/EBITDA of 11x, and MTN at 5.5x. Moreover, MTN currently generates free cash flow, while Bharti is only expected to be FCF neutral this year. Hence, the deal appears to favour the latter.

Potential merger impact on SingTel. Post-merger, SingTel's stake in the Bharti will be reduced from 30% to 19%, while SingTel's EPS is estimated to slide by 1.5%in FY11. We believe that should Bharti require funds for this merger, SingTel will stand ready to support. Based on our estimates, Bharti may need to raise up to US$4b if the deal goes through. According to the media in India, Bharti will fund the acquisition through debt, but assuming half the amount is through equity, SingTel may have to fork out US$600m.This would raise SingTel's net gearing from 28% to 32%, still very manageable given its strong balance sheet.

Singtel - Likely to Provide Good Support

Solid 4Q, guidance in line. Better-than-expected operational performance in Singapore and Australia drives 4Q results ahead of our top-of-the-Street views. Guidance into FY10 is line with expectations though. All in all, these results are likely to provide good support to stock that has been up 10% in last ten days.

4Q results detail. Recurring profits of S$942m (-3.0% yoy) was higher than our top-of-Street S$924m view. EBITDA of S$1.15bn (flat yoy) was higher than our S$1.06bn view. Associate contributions at S$531m (-20yoy, +6%qoq) were in line with our S$536m view. Final DPS at 6.9cents, in line with CIRE of 6.9cents.

FY10 guidance – no surprises. (1) Singapore: single digit top line growth; margin down to 36-38% (39% in FY09): CIRE at 5.3% rev, 2.5% EBITDA growth on 36.3% margin. Capex of S$800m (we are at S$730m); (2) Optus – low single digit operating rev and EBITDA growth (CIRE at 4.7% rev, 3.5% EBITDA growth), S$1.1bn capex in line; associates – Bharti, T’sel highlighted as growing LCY earnings (CIRE at 24.5% associate growth off low FY09 base).

Singapore: good all-round numbers. 6% organic top line growth (despite weak economy) is a positive and highlights SingTel continues to take share. S$563m of EBITDA also higher than our S$529m view on good cost controls.

Optus: higher mobile margins drive higher EBITDA. Higher mobile margins (31.5% in 4Q versus 27% 9M YTD) saw 8.5%yoy EBITDA growth in 4Q to S$584m (CIRE A$530m). The revenue-share enhancement versus margin trade-off should continue into ’09 as evident from “low single digit” EBITA growth guidance into FY10; we should not see this margin increase as permanent.

Indian election lifts SingTel price target from S$2.85 to S$2.90

We see limited tangible synergy benefits from the MTN-Bharti tie up. The biggest global telecoms conglomerate is Vodafone Group and we would argue that its individual country operations do not seem to benefit too greatly from being part of the Vodafone family. Roaming benefits, which are often quoted, would seem to be of limited value in the MTN countries. Some of MTN’s operations may be able to benefit from Bharti’s experiences in India where it has been one of the most successful and consistent emerging market operators, lifting its market share from 18% to 25% over the past 5 years despite ever increasing competition. However, this brings us back to a potential loss of focus in the Indian market at a particularly sensitive time.

Investors have wondered for some time about the strategic importance of SingTel on Bharti’s share register. In the early days Bharti benefited from SingTel’s mobile know how. But is Bharti still benefiting from SingTel now that it has proven itself in the Indian market? SingTel has always maintained that it is only interested in strategic shareholdings in associates where it can positively influence the associate company and add value. Should this transaction proceed, it would be clear that Bharti is placing more strategic importance in the MTN relationship than the SingTel relationship given MTN would end up with a 25% stake in Bharti while SingTel would end up with 19.5%.

SingTel may keep its 19.5% stake as a good emerging market investment but we doubt whether it can add much value to the enlarged Bharti-MTN group in the longer term. We also note that Bharti would be the primary vehicle for both Bharti and MTN to pursue further expansion in India and Asia. Bharti is already invested in Sri Lanka and SingTel has a presence in most of the major South East Asian markets. It would seem that Asian expansion for Bharti might be difficult without cutting into SingTel’s turf.

Like most Indian stocks, Bharti had a big run-up following the results of the Indian election. While this has been a general stock market theme there are high hopes that the Congress-led United Progressive Alliance’s return to power in the Indian election will help push through some much needed regulatory reforms specific to the telecoms sector. Under the previous government, the Ministry for Communications was lead by a DMK party representative, A Raja. With a UPA representative likely to be put in charge of the Ministry, we would expect better progress on such issues as 2G spectrum policy and 3G spectrum licensing. A listing of government-owned telco Bharat Sanchar Nigam (BSNL) is also now being mentioned as a stronger possibility.

Since we last wrote on SingTel following the FY09 result on 14 May, Bharti’s stock price has run up from Rs765 to Rs810 (despite the 5% fall in Bharti’s stock price on today’s announcement). This is the main driver behind the lift in our SingTel target price from S$2.85/sh to S$2.90/sh. Our valuation for SingTel is outlined on the following page.

SingTel: Associates, forex turn positive

4QFY09 in line with expectations. In the three months to 31 Mar 09, earnings came off 17% to S$903m, which was in-line with DMG’s estimates (S$910m) but above consensus (S$853m). The fall in earnings was due largely to forex (A$ slumped 21% YoY) and operational weakness in Telkomsel and AIS.

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.