Rising operating and investment risks. We have lowered our FY13-14 forecasts by 3-4% following SingTel’s cut in full year guidance. Both Singapore and Australia are facing lower growth prospects on the back of the slowing economies. In addition, we see heightened risks of investment-related losses, eg Warid, for which SingTel is now cutting its losses. Maintain SELL with SOTP target price of SGD3.00. Prefer StarHub for resilient earnings and dividend yield.

Missed the consensus cut. 2QFY3/13 results missed the consensus but were inline with our forecast, which was lower than the street by 2.5%. Underlying net profit was flat YoY at SGD886m (up 4% QoQ) while revenue performance was flat YoY/QoQ at SGD4574m. EBITDA rose 1%/2% YoY/QoQ. Profitability was dragged down by start-up losses in Singapore from newly-acquired Amobee, Optus continued to be hit by lower mobile termination rates, while Bharti disappointed.

Guidance lowered. SingTel now expects group revenue to decline in the low single digits (from low single growth), driven by revised-down expectations in Australia, mainly the consumer side. Optus is facing the brunt of lower mobile termination rates, as well as intense price competition amidst a slowing economy, not a good combination. In Singapore, start-up losses from acquisitions are expected to continue eating into profits. We also expect margins in the current quarter to be affected by iPhone 5 related subsidy costs.

Rising risks. As SingTel attempts to remake itself, it is spending big money to build a content eco-system and taking on the attendant risks. Amobee alone cost USD321m and added that much in intangibles. If it fails, it faces the situation it does now with Warid Telecom. Having invested SGD1.3b since 2007, SingTel is now trying to sell its 30% stake but faces a potential SGD366m hit to the P&L (depending on the sale price) from currency translation losses over Warid’s carrying value.

Forecasts cut, maintain SELL. We have further lowered our FY13-14 forecasts by 3-4% after incorporating the latest guidance. Accordingly, our SOTP-based target price is also lowered to SGD3.00. Maintain SELL on SingTel, with negative catalysts seen in both operating earnings and investments. Prefer StarHub for resilient earnings and dividend yield.

Source: Maybank Kim Eng Research - 15 Nov 2012