SG: SingTel (ST SP) Telco | A Poor Start To The Year

Price Target: $3.03 | Sell | Downside 10%

Still on the wrong side of key trends. We expect SingTel to continue to face margin, competitive and currency headwinds in FYMar2013. The best that can be said is that earnings are likely to be stable, hence we have trimmed our forecasts only slightly despite a below-expectations first quarter. However, the same cannot be said of cashflow, as capex is expected to rise on the back of 4G rollout and potentially expensive 4G spectrum auctions. Moreover, net debt/EBITDA is high at 1.1x. Against this backdrop, we see no upside for dividends. Maintain SELL.

Below expectations. SingTel reported underlying net profit of SGD850m, down 2.5% YoY and 16.9% QoQ, in 1Q13. The main culprits were escalating subscriber acquisition and retention costs in Singapore, a poor showing by Optus in Australia due to structural changes in its business, and headwinds from regional currencies in particular the rupee, rupiah and Australian dollar. 1Q13 results included an exceptional gain of SGD119m from the sale of Far EasTone stake.

No upside for earnings. SingTel has maintained its outlook of low single digit growth in revenue and flat EBITDA, implying a squeeze on margins, for both its Singapore and Australian businesses. In line with our expectations of muted performance for its associates, 1Q13 share of associates were flat YoY at SGD506m, about 40% of group pretax profit. Better results from AIS, Globe, Telkomsel and Bharti Africa were offset by weakness in core Bharti markets.

Potential downside for cashflow. We expect free cashflow (excluding dividends from associate) to fall from SGD2.5b in FYMar2012 to SGD2.4b in FYMar2013 on the back of acquisitions, 4G network rollout in Singapore and Australia, rollout of cloud computing services for enterprises and a potentially expensive bid for BPL. There is potential downside to FCF as SingTel’s capex guidance does not include 4G spectrum auction costs in Singapore and Australia.

Maintain SELL with SOTP-derived TP of SGD3.03. Our target price for SingTel has risen on the back of higher target prices for Globe, AIS and Bharti in recent weeks. However, we prefer M1 for telco exposure as it offers a superior yield of 5.6% at current levels.

Source: Maybank Kim Eng Research - 15 August 2012