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February 11, 2009

SingTel’s earnings under pressure from tighter competition
Singapore Telecommunications, touted as a defensive stock in volatile markets, faces new challenges in its overseas businesses that account for 70 percent of earnings.

Reuters reported that competition is intensifying in Australia, where a merger between Vodafone and Hutchison Whampoa will challenge SingTel's associate Optus. Also, overseas earnings are being dented by a strong Singapore dollar.

SingTel shares have fallen over 5 percent year to date, roughly in line with the broader market. The stock fell 36 percent in 2008 against the benchmark index's 49 percent drop.

Investors are wondering if they should take the plunge or hold back in anticipation for more weakness in the cash-rich firm that has hinted at more acquisitions to grow its international business.

Kelvin Goh, an analyst at CIMB, cited improved margins in Singapore and Australia and strong quarter-on-quarter performances by mobile affiliates Telkomsel and Bharti for his "outperform" recommendation on SingTel.

"The previous quarters of high acquisition costs are gone," he said, referring to expenses incurred during the launch of the Apple i-Phone in Singapore and Australia that involved the use of subsidised handsets to boost take-up rates.

"The new customer acquisitions will help drive future earnings," said Goh, who has a target price of S$3.10 on SingTel. SingTel shares were trading at S$2.43 by the midday break.

"Telecoms is one of the more defensive industries where earnings will not fall off the cliff although minutes of usage may fall with the economic slowdown," said Christopher Wong, a fund manager at Aberdeen Asset Management, which owns SingTel.

Ian Martin, an analyst at ABN Amro Australia, said there were risks involved in holding SingTel, including a deterioration of economic condition in Singapore. "Revenue, particularly in Australia, is stronger than expected but there is no margin from it -- meaning the generated extra revenue without lifting the EBITDA," he said.

EBITDA refers to earnings before interest, tax, depreciation and amortisation.

Citigroup analyst Anand Ramachandran, who has a "hold" recommendation, said SingTel's valuation of about 11.7 times 2009 earnings is higher than the average for the Singapore market and other telecoms firms.

He has a "buy" rating on China Mobile and on India's Bharti. "Earnings uncertainty surrounding SingTel's NBN (Singapore national broadband network) initiatives and the volatility in the regional currencies could further hamper associates' contribution," he added.

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