Odds stacked against SingTel dominance in next two years: Maybank

Stiff competition and regulatory uncertainties abound.

Here's more from Maybank Kim Eng:

Still a cost-heavy bottomline. We are currently forecasting SGD3,671m in net profit for FYMar 2013 for SingTel. As 1H13 net profit already came to SGD1,857m (+3%/-15% YoY/QoQ) or 50% of our full year forecast, this suggests a flat performance HoH. This is a poor result given that 2H is usually a stronger period as it covers the seasonal peaks. 3Q13 profit could have risen sequentially but we would not expect YoY growth, probably in the range of SGD880-900m (2Q13: SGD868m, 3Q12: SGD903m). However, all these are mere details, as SingTel has already lowered its guidance in the last quarter on the back of Optus’ downward revision of earnings expectations.

Serious problems at the top. Fundamentally, SingTel’s prospects in FY13 and FY14 will continue to be challenged by stiff competition and aggressive market behaviour as well as regulatory uncertainties, especially in India. In addition, profits will be undermined by its new start-up investments and we see little prospects for positive returns from these investments in the short to medium term given their bleeding-edge nature (eg mobile advertising). Without a doubt, it will continue to invest in new technologies in future. In fact, management has repeatedly declined to disclose the budget for new investments, citing strategic sensitivity.

Reversal of roles. All these however does not mean SingTel is not doing well at the marketplace stakes. In fact, it is gaining market share in mobile, fixed broadband and Pay TV, and it is also reporting strong takeup of its tiered data plans since launch last year. The problem is growth in topline is not translating into growth at the bottomline as SingTel is spending big money to cast its Pay TV service in a lossleader role while it expands overall market share by aggressively bundling togethr services. This kind of predatory market behaviour is more typical of upstart challengers to incumbents. In SingTel’s case however, the incumbent is more often than not rocking the industry boat. We do not see this changing anytime soon.

Recent rise on Myanmar fever. The stock recently rose on speculation that it is bidding for four operator licences being put up for grabs by the Myanmar government. The other three bidders are understood to be Malaysia’s Axiata, ST Telemedia (major shareholder of StarHub), Digicel and most recently, Bharti Airtel as well. Myanmar is one of the final frontiers of telecommunications, a country of 60m people but less than 3m mobile users, or a penetration rate of only 5%. If successful, it would certainly be an exciting market as the government is targeting 50% penetration as early as 2015. However, the main bottleneck is extremely poor infrastructure, with transmissions systems consisting mainly of microwave station and satellite links, with international connectivity chiefly through only one undersea cable. Also, handset cost in the country is extremely high, equivalent to one year’s per capita income. Clearly, heavy initial investment is needed and this could drag down cashflow further.