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.

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Mobileone - Cost controls in place but little else

In line. M1’s 1H09 annualised results are in line with market and our expectations, with deviations of 0.3% and 0.7% respectively. As expected, a tax-exempt interim DPS of 6.2cts (2Q08: 6.2cts) for a 70% net payout was declared.

Topline belatedly rose. M1 reversed four successive quarters of revenue decline with revenue growth of 2.2% this quarter, thanks to higher postpaid revenue, more emphasis on customer acquisition/retention, higher handset sales, stabilising roaming and robust growth of wireless broadband. Postpaid revenue (65% of 1H09 revenue) rose 1.1% qoq, aided by a 0.8% qoq increase in postpaid subscribers and a 1.1% increase in ARPUs largely due to the success of its Take 3 programme. Take 3 has also attracted more mid-to-high-end users.

Cost controls hemmed in higher SARC. Despite chasing market share and ramping up subscriber acquisition and retention costs (SARC), EBITDA margins were fairly stable qoq (+0.1% pt qoq), thanks to fairly active cost control. The main savings came from lower staff costs from a freezing of headcount, and lower bonuses and bad debts.

Guidance in place. M1 elucidated its 1Q guidance of “stable operations”. It now expects FY09 PAT to be comparable to FY08’s, in line with our forecast of 1.8% yoy growth, despite challenging operating conditions. It will continue to focus on cost management, efficiency, the introduction of new initiatives to address growth segments and investing in future growth. M1 also reiterated its dividend policy of an 80% net payout for FY09.

Maintain forecasts, target price and rating. We leave our forecasts and DCFbased target price of S$1.54 (WACC: 11.5%, LT growth: 1%) intact as the financial performance was in line. M1 remains a NEUTRAL as we see few positive catalysts for the stock. While revenue has rebounded qoq, growth remains unexciting. But downside should be limited by its attractive yields of about 9%. Our top pick remains SingTel (OUTPERFORM, target of S$3.20 under review). For exposure to yields, we advocate a switch out of StarHub (Underperform, target S$1.58) to M1.

K-Reit - Positive rental reversions continue

KREIT’s net-property income, up 13.8% QoQ, was 27.7% above our forecast, helped by an easing of property taxes and other expenses.

Top-line growth, up 3.9% QoQ, was also impressive, considering that occupancy for KREIT’s properties (excluding its one-third stake in One Raffles Quay, which was fully occupied) deteriorated slightly to 92%, from 93.4% at the end of March. Even though spot rents continued to fall, KREIT’s lease renewals were still accretive because passing rents increased QoQ for all properties and expanded overall to S$7.11 per square foot/month (from S$6.71 per square foot/month for 1Q FY09).

We have raised our target price to S$1.23 from S$1.03, based on our RNG valuation method, after lowering our effective cap-rate assumption to 5.75% from 6.5%. As with all office S-REITs, we use 2008 core-operating distribution as the basis for our valuation since it captures what we believe is a reasonable mid-cycle passing rent (about S$5.64 per square foot/month for its investment properties).

We have revised up our DPU forecasts by 14.5% for FY09, 6.1% for FY10, and 6.2% for FY11 on higher rental renewal assumptions. We have also lowered our operating expense assumptions and assume that the manager can maintain overall occupancy at 92% for the rest of 2009 before the occupancy falls to an estimated 87% for 2010 due to the addition of new office supply.

We maintain our 2 (Outperform) rating for KREIT because we believe it is one of the few S-REITs that offer value. Our target-price is based on 0.55x on our June 2009 NAV. Even though the manager did not revalue the properties, we believe the debt-to-asset ratio of 27.8% is highly defensive. How attractive KREIT remains will depend on the results of the other S-REITs, in our view.