SingTel’s earnings to drop 2% in FY12

In a different league from its local peers
Unlike its local peers that have concentrated exposures to Singapore’s Telecommunications industry, SingTel is a leading communications service provider with diversified geographical exposures. The core part of SingTel’s business resides in Singapore & Australia, while meaningful stakes in its regional Associates provides the Group with exposure across  Asia-Pacific. Thus, the stock offers investors a mix of stability from matured markets & upside potential from developing markets.

NGNBN to provide open up corporate space, but we expect SingTel to stay dominant Currently, Singapore has c.80.7k corporate fixed broadband customers. While the exact market share splits were not disclosed, SingTel is known to be the dominant player in this segment. With the launch of NGNBN, entry barriers were lowered for new entrants. M1 & Starhub would now be able to offer similar fixed services to higher value corporate customers. The two smaller local Telcos are likely to target the more price sensitive Small and Medium Enterprise market with cheaper price offerings.

While the two smaller players would be able to challenge SingTel’s dominance in this space, we do not foresee a major loss of market share for the incumbent, as SingTel is able to provide a more holistic business offering with other ICT services. As an example of its holistic service offering, SingTel recently announced the launch of a cloud-based application that would allow SMEs to subscribe to SAP business management systems. This provides SMEs with the opportunity to enhance their efficiency through the use of quality business software without incurring high initial investment outlays.

MioTV to gain market share, but profitability unclear
SingTel’s PayTV business recorded substantial growth in subscriber base since launching of the
highly popular Barclays Premier League programme. While SingTel had never publicly disclosed the cost of this programme, Frost & Sullivan (2009) estimated the winning bid to be in the range of S$300-400mn for 3yrs. One year into the broadcast, total MioTV revenue amounted to only S$89mn and is an indication that this business segment is far from profitable.

However, we expect increased penetration of MioTV with SingTel’s bundling offers and explicitly
modeled in high subscriber growth over the next few years, bringing subscriber base on par with
Starhub by the end of 2014.

We expect slight decline in Singapore’s EBITDA contribution
While we expect consistent revenue growth over the next few years, we do see some margin
pressures in the near term. Consequently, we expect a 2% decline in EBITDA for SingTel Singapore before a growth of 2-6% in FY13-14E.

Financial Forecasts
We expect SingTel to record a marginal decline in profits for FY12E largely due to competitive threats facing the company from Singapore and Optus. Subsequently, profit growth is expected to gather pace with growing contributions from its Associates. Dividend payout is also expected to moderate to a sustainable 14.6-15.6¢ over the next 3years. Our current forecasts showed that Net Debt to EBITDA would reach similar levels to FY11 at 0.9X by end FY13E. This could offer scope for capital distributions that is currently not incorporated in our projections.