SingTel-Macquarie

Optus rebound not in the price
Event
Investor sentiment towards Optus remains poor so far, which is perhaps not
surprising considering that mobile margins have plummeted from 40% in
FY3/05 to around 27% YTD. Even so, we view ongoing market consolidation
as a watershed event that should lead to a rebound in Optus’s margins to
30% by FY3/10, and this should drive a re-rating of SingTel, in our view.
We raise our target price to S$3.10 (from S$2.95 previously) and reiterate
Outperform rating on the stock. SingTel continues to be a top pick in both our
regional telecom and regional strategy model portfolios.
Impact
Optus to benefit from Voda-Hutch merger: We view the opportunities for
Optus from the Vodafone-Hutch merger as material in the short to medium
term, and this is occurring at a time when Optus has positive momentum in
the industry. We are raising our fair enterprise value estimate for Optus by
12% based on 8–13% upgrades in FY3/10–11 EBITDA.
Singapore – lower tax drives minor upgrade: The lowering of the corporate
tax rate from 18% to 17%, together with the consolidation of the recently
acquired IT services unit, could drive minor valuation and FY3/10–11 revenue
(~12%) and EBITDA (~0–2%). Recessionary conditions, the effect of the
government’s broadband project (NBN) and potential pay-TV price
competition are key issues for the Singapore market. We think new-entrant
risks through the NBN process are low because only an estimated 13% of
retail broadband users are on high-end plans (>10Mbps).
Indonesian recovery thesis on track: Results from Indonesia’s No. 3 player
Excelcomindo (EXCL IJ, Rp1,000, OP, TP: Rp1900) confirm our analyst Ken
Yap’s thesis that smaller players are getting increasingly marginalized in the
market as access to capital is curtailed. Telkomsel’s (unlisted) recovery
appears to be back on track as reflected in 12% sequential QoQ growth in
service revenues (vs -11% QoQ for EXCL).
Earnings revision
We are raising our FY3/10–11 EPS estimates by 1.2–2.4%.
Price catalyst
12-month price target: S$3.10 based on a Sum-of-Parts methodology.
Catalyst: Optus's margin recovering to 30% in FY3/10.
Action and recommendation
The key elements of our bullish thesis – an inexpensive core business, value
accretion for investment holdings as late entrants face financing issues and
safety in the strong balance sheet and cash-backed 4–5% yield – remain
firmly intact, and we reaffirm our Outperform rating.
Our sum-of-the-parts derived target price translates to a FY3/10 PER of
13.5x. SingTel’s valuation appears to be attractive based on our forecast of a
10% FY3/09–12 EPS CAGR.