AUSTRALIA SGT AU Price (at 05:10, 06 Dec 2012 GMT) Outperform A$2.59 Volatility index Low 12-month target A$ 2.81 12-month TSR % +14.6 Valuation - Sum of Parts A$ 2.81 GICS sector Telecommunication Services Market cap A$m 41,295 30-day avg turnover A$m 7.5 Number shares on issue m 15,944 Investment fundamentals Year end 31 Mar 2012A 2013E 2014E 2015E Revenue m 18,825 18,754 19,011 19,550 EBIT m 4,649 4,534 4,678 5,369 Reported profit m 3,979 3,681 3,775 4,414 Adjusted profit m 3,946 3,583 3,775 4,414 Gross cashflow m 5,948 5,790 6,271 6,837 CFPS 37.3 36.3 39.3 42.9 CFPS growth % 3.4-2.8 8.5 9.0 EPS adj 24.8 22.5 23.7 27.7 EPS adj growth % 4.5-9.3 5.4 17.0 PER adj x 13.4 14.8 14.0 12.0 PER rel x 0.96 1.04 1.12 1.03 Total DPS 15.8 15.8 15.8 16.8 Total div yield % 4.8 4.8 4.8 5.1 Franking % 0 0 0 0 ROA % 11.7 11.3 11.5 12.7 ROE % 16.5 15.2 15.5 17.1 EV/EBITDA x 11.6 11.6 11.3 10.7 Net debt/equity % 31.8 33.3 31.7 21.4 SGT AU vs ASX 100, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, December 2012 (all figures in SGD unless noted) Indo upgrade, India upside Event Following upgrades to our estimates and valuation for 35%-owned associate Telkomsel, we have increased our target price to S$/A$2.81 (from S$3.53/A$2.76) and maintain our Outperform recommendation. Improved competitive dynamics in the Indonesian telecoms market and better execution (see PT Telkom Executing better on data by Riaz Hyder) by Telkomsel were key drivers of these upgrades. Impact Indonesia rational competition, growing data. Macquarie s Riaz Hyder has raised his estimates and valuations for the Indonesian telecoms sector (see Indonesia Telecoms Streaming ahead). He sees the competition in Indonesian as increasingly rational with operators concentrating on product/service differentiation rather than pure price to attract subscribers a perennial problem in the past. Also with incumbent operators building out their own data businesses, there seems to be a greater focus on cashflow generation to fund network expansion. Telkomsel better execution fuels upgrades. In addition to the improved market dynamics, improved execution on the part of Telkomsel has also fuelled a 13-25% upgrade in Riaz s FY12-15 estimates for Telkomsel and an 11% upgrade in his DCF-derived valuation for Telkomsel. India moving in the right direction. While the Indian telecoms market environment remains fluid, we are increasingly positive on its outlook. Recent discussions with senior management teams from Axiata and Telenor have provided added comfort on the outlook for competition and allayed the fear of future policy changes unwinding the outcome of the recent 2G spectrum bid thanks to a well thought of and transparent process. For, Bharti remains the biggest contributor (42%) to the valuation gap between its current price and our target valuation (see Fig 4). Earnings and target price revision FY13-15 estimates increased 1.6-4.7%, largely on the back of upgrades at Telkomsel. Sum-of parts derived target price increased from A$2.76/S$3.53 to A$2.81/S$ as a result. Price catalyst 12-month price target: A$2.81 based on a Sum of Parts methodology. Catalyst: Improved regulatory and competitive outlook in India. Action and recommendation Maintain Outperform. 7 December 2012 Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website www.macquarie.com/disclosures.
Analysis Sum-of-parts derived target price raised from S$3.53 to S$ (A$2.81) Fig 1 - Sum of Parts Valuation Stake EV Equity PER EPS CAGR EV/ EBITDA EBITDA CAGR Methodology Key assumptions^ (%) (S$m) (S$m) S$/sh 13E 14E FY12-15 13E 14E FY12-15 Singapore DCF W=8.6%; LT gr = 1.0% 100% 21,349 21,349 1.34 16.5 15.3-0.5% 9.8 9.3 5.4% Optus DCF W=0.0%; LT gr = 0.0% 100% 18,177 15,605 0.98 13.4 16.7-2.8% 5.9 5.1 0.7% Holding co net debt (5,915) (0.37) Singapore + Optus 39,525 31,038 1.95 12.6 13.3-1.8% 7.5 7.4 1.6% Bharti Consensus Pre-spectrum uncertainty 32.3% 10,976 0.69 38.3 25.6 22.4% 8.1 7.1 11.2% Telkomsel DCF W=12.4%; LT gr = 3.0% 35.0% 9,094 0.57 11.4 10.7 6.5% 5.9 5.7 3.7% AIS DCF W=8.4%; LT gr = 1.0% 21.3% 6,262 0.39 19.0 17.3 8.3% 10.8 10.0 8.3% Globe DCF* W=8.0%; LT gr = 0.0% 47.0% 2,113 0.13 11.5 10.5 8.7% 4.8 4.6 4.8% Singapore Post Market 25.5% 515 0.03 Others inc PBTL, Book 387 0.02 Warid etc^ Holding co discount 10.0% (2,935) (0.18) Value of associates 26,413 1.66 Target value of group 57,430 16.1 15.2 15.2 6.8 6.5 3.3% ^ W= WACC, LT Gr = long term growth rate; * Cap rate based DCF Source: Company data, Macquarie Research, November 2012 We have raised our sum-of-parts derived target price for from S$3.53 to S$ following the upgrade to our target valuations for Telkomsel and AIS (see Advanced Info Service Aggressive roll out planned, by Best Waiyanont). Our A$ target price increases from A$2.76 to A$2.81. Fig 2 below outlines the impact of estimates changes at these associates on our overall estimates. Fig 2 - forecast changes New Old Change S$m 13E 14E 15E 13E 14E 15E 13E 14E 15E Revenue 18,751 19,011 19,550 18,754 19,011 19,550 0.0% 0.0% 0.0% EBITDA 5,232 5,365 5,649 5,231 5,365 5,649 0.0% 0.0% 0.0% Associates 1,492 1,809 2,142 1,436 1,659 1,948 3.9% 9.0% 10.0% Net profit 3,665 3,775 4,414 3,608 3,624 4,214 1.6% 4.2% 4.7% Fig 3 Changes to AIS and Telkomsel driving valuation change S$/sh 3.62 3.58 0.05 3.56 0.02 3.54 3.53 3.52 3.50 3.48 Previous AIS Telkomsel New 7 December 2012 2
Bharti still key to valuation gap narrowing Fig 4 Bharti represents 41% of the valuation gap S$ 3.7 3.6 0.12 0.05 0.04 3.5 0.10 3.4 3.3 3.30 3.2 3.1 3 Current Share Price -0.01 Core Bharti Telkomsel AIS Globe Others Target By our estimates, Bharti represents 42% of the gap between s current price and our target price. A further 34% is explained by the discount between the core Singapore and Optus businesses relative to fair value. The key to narrowing the gap for Bharti lies in the regulatory and competitive environments in India. On both counts, we see matters improving over the next 12 months and supporting our positive stance on. In the longer term, improvements from the African business should provide an added leg up. Added earnings and cashflow visibility could also lead to higher dividends from Bharti which at the moment pays Rs1/sh (0.3% dividend yield) representing a meagre 3% of s S$1bn dividend income from associates, despite contributing 16% of FY14E associate earnings. Fig 5 Bharti to contribute 16% of FY13 associate profits... Fig 6...but only 3% of dividend contribution Globe 10% Others 2% Bharti 16% Others 10% Bharti 3% Globe 14% AIS 22% Telkomsel 48% Telkomsel 50% AIS 25% 7 December 2012 3
The numbers Fig 7 - Summary Profit & loss (S$m) Yr ending 31 Dec 10A 11A 12A 13E 14E 15E Revenue 16,871 18,071 18,825 18,751 19,011 19,550 growth 13% 7% 4% 0% 1% 3% Singapore 5,995 6,401 6,551 6,787 7,043 7,383 Optus 10,876 11,670 12,275 11,964 11,968 12,167 Operating Expenses 12,119 13,082 13,710 13,544 13,687 13,939 13,607 Other Income 95 130 103 25 41 38 EBITDA 4,847 5,119 5,218.740 5,232 5,365 5,649 EBITDA margin 28.7% 28.3% 27.7% 27.9% 28.2% 28.9% Depreciation & amortisation (1,878) (1,969) (2,002) (2,206) (2,496) (2,422) EBIT 2,969 3,151 3,217 3,026 2,869 3,227 Net finance costs (334) (324) (341) (369) (346) (312) Acquisitions leading to higher debt levels Share of associate profit 1,862 1,564 1,431 1,492 1,809 2,142 (NET aft EI) - Bharti group 841 566 351 241 422 591 Improving pricing environment in India and turnaround of African operations - Telkomsel 682 639 665 751 795 862 Improved trajectory on better execution and more rational competitive environment - AIS 148 191 279 327 340 399 - Globe 164 138 131 147 189 207 - Others 26 30 6 26 63 83 Exceptionals 5 55 7 102 - - Pre-tax 4,501 4,446 4,314 4,251 4,332 5,057 Tax (595) (624) (334) (584) (555) (641) Profit after tax 3,907 3,822 3,981 3,667 3,777 4,416 Minorities 1 3 (2) (2) (2) (2) Net profit 3,907 3,825 3,979 3,665 3,775 4,414 growth 13% -2% 4% -8% 3% 17% Core profits Pre-tax 4,497 4,391 4,308 4,149 4,332 5,057 Net 3,903 3,745 3,972 3,562 3,775 4,414 growth 6% -4% 6% -10% 6% 17% Other stocks mentioned: Bharti Bharti Airtel (BHARTI IN, Rs324.80, Outperform, TP: Rs476.00, Abhishek Singhal) Telenor TEL NO, NOK113.7, NR 7 December 2012 4
Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 60 100% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 Sept 2012 AU/NZ Asia RSA USA CA EUR Outperform 50.00% 56.85% 61.54% 41.38% 63.19% 44.15% (for US coverage by MCUSA, 7.35% of stocks covered are investment banking clients) Neutral 36.62% 25.14% 27.69% 52.13% 30.77% 30.57% (for US coverage by MCUSA, 9.31% of stocks covered are investment banking clients) Underperform 13.38% 18.02% 10.77% 6.49% 6.04% 25.28% (for US coverage by MCUSA, 0.00% of stocks covered are investment banking clients) Company Specific Disclosures: Macquarie Bank Limited makes a market in the securities in respect of Singapore Telecommunications Limited. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. Analyst Certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN 94 122 169 279, AFSL No. 318062) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General Disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. 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