SingTel 02 june 08 Lehman

8/14/2019 SingTel 02 june 08 Lehman

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EQUITY RESEARCH

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We spent the past week with SingTels management on a non-deal roadshow (NDR) to meet with investors in North America. After this

NDR, we are maintaining our 1-OW investment opinion as well as our $4.50/share 12-month target price based on a sum-of-the parts

valuation.

In this note, we present answers provided by SingTel management for key questions asked by investors during the roadshow:

Q: What are SingTels thoughts regarding returning capital to investors?

June 02, 2008

SingTel (STEL.SI - SGD 3.81) 1-OverweightCompany Update

Key takeaways from SingTel NDR

Investment Conclusion

After our non deal roadshow with SingTelmanagement, we are maintaining our 1-OWinvestment opinion as well as our 12-month targetprice of $4.50/share based on a SOTP valuation.

Summary We believe EBITDA margins in Singapore will

remain under pressure during 1Q09 from highermobile acquisition costs ahead of the introductionof number portability in June.

Optus will focus on cap plans to encourage morefixed to mobile substitution. Capex and opex likelyto be high to build out 3G network to 96% popcoverage by Dec 08.

Instead of one-time capital reductions, SingTel willfocus on higher annual payout ratios.

SingTel is still interested in acquisitions indeveloping markets but thinks that theprivatization of mobile companies in Vietnammight continue to be delayed. SingTel is willing toincrease leverage for acquisitions but will maintainits investment grade status.

Associate growth will be lower in FY09 due tocompetitive pressures in Indonesia and a full-yearconsolidation of Warid in Pakistan.

Paul Wuh852.2252.6182

[email protected], Hong Kong

Singapore

Asia Telecom Services

Reuters STEL.SI

Bloomberg ST SP

ADR

Performance 1M 3M 12M

Absolute % -1.3 -1.0 7.6

Rel. Market % -1.7 -5.2 17.2Rel. Sector % 0.0 0.0 0.0

52 Week Range 4.10 - 3.30

FY Mar 2008A 2009E 2010E 2011ECurrency SGD Actual Old New Old New Old New

Revenue 14839 15468 15468 15798 15798 16039 16039EBITDA 4530 4701 4701 4788 4788 4820 4820

EBITDA margin 30.5 30.4 30.4 30.3 30.3 30.1 30.1Recurring NP 3615 4403 4403 4825 4825 5172 5172

Recurring EPS 0.23 0.28 0.28 0.30 0.30 0.33 0.33P/E (Recurring) 16.4 13.6 13.6 12.4 12.4 11.6 11.6EV/EBITDA 7.9 N/A 7.4 N/A 7.0 N/A 6.9

FCF Yield (%) 6.1 6.9 6.9 7.1 7.1 7.5 7.5

Market Data

Market Cap (mn) 60660

Market Cap (US$ mn) 44387

Shares Outstanding (mn) 15921.2

6mth Daily T/O (US$ mn) 76.14

Free float (%) 34.00

Share per ADR N/A

Financial Summary

3-Yr EPS Growth(%) 12.7

3-Yr EBITDA Growth(%) 2.1

Current BVPS 1.3

Debt-to-Equity(%) 35.2

Gearing 26.0

PEG Ratio 1.3

Dividend Yield (%) 2.62Stock Overview

30/5/0

M J J A S O N D J F M A M J J A S O N D J F M A M2.20

2.40

2.60

2.80

3.00

3.20

3.40

3.60

3.80

4.00

4.20x10-4

9.00

9.50

10.00

10.50

11.00

11.50

12.00

12.50

13.00

13.50

14.00

14.50

SINGAPORE TELECOMT:TELC/SNGPORI(R.H.SCALE)

Source: DATASTRE

Stock Rating Target Price

New: 1-Overweight New: SGD 4.50

Old: 1-Overweight Old: SGD 4.50

Sector View: 1-Positive


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A: SingTel has increased its dividend payout guidance to 45% to 60% for FY09 from 40% to 50% last year. The company would ratherincrease its regular dividend payouts rather than having more one-time capital reductionsas more stable regular dividends tend to

have a more positive impact on the share price performance over an extended period, according to the company.

SingTels decision not to pay out a one-time capital reduction for 2H 08 was partially due to this thought process. In addition, SingTelwants to maintain its cash position for potential acquisitions.

Q: What are SingTels thoughts on future acquisitions?

A: SingTel is focused on acquisitions where the company can take a meaningful equity position and where it can have an impact on theoperations of the company. The company does not want to take an interest in a company as a portfolio investment (as Vodafone has

done with its investment in China Mobile). Moreover, SingTel will remain disciplined in its approach to evaluating synergies and value

creation potential for any acquisition. SingTel is wiling to increase its debt level for the right acquisition at a compelling valuation level

but intends to maintain its investment grade rating.

SingTels management indicated that it has become much more difficult to find compelling investment opportunities in developing

market wireless companies at attractive valuation levels. In addition, there are many more investors looking for wireless investments

than when SingTel made its first investments in SE Asia and India. Although the level of interest from private equity investors forwireless assets has declined recently (given the difficulty with these PE firms to secure funding), there remains a great deal of interest

from Middle Eastern and Russian companies. SingTel would not be willing to go on a bidding war with any of these potential investors.

Q: What about the opportunity for SingTel to invest in a mobile network in Vietnam?

A: SingTel (along with many other foreign telcos) remains interested making an investment in the Vietnamese mobile market. However,

the mobile assets are still state-owned and the potential privatization has been delayed numerous times. Currently, the Vietnamese

stock market has been very weak and this has further complicated the telecom privatization process.

Q: What are SingTels thoughts on MTN and its acquisition strategy?

A: MTN has had many discussions with a variety of international mobile companies over the past year including Bharti, China Mobile,

and other Indian wireless carriers. SingTel has mentioned publicly that it is interested in making investments in countries inneighboring markets including SE Asia, the Middle East, and Africa. As with any potential acquisition, SingTel would take a disciplined

look at the economics of an investment in MTN by SingTel (or any of its associates). SingTels management did not make any specific

comments related to MTNs recent discussions with Bharti or the withdrawal from negotiations.

Q: Any comments on the introduction of the iPhone into any SingTel market?

A: At this point, SingTel is bound to a confidentiality agreement with Apple and has not comments other than to say that it expects the

iPhone to be available to its affiliated companies in Singapore, Australia, and India before the end of this year. There was no

commentary on handset subsidies or revenue sharing agreements. However, SingTel believes that the iPhone will be popular inSingapore market where data revenues represented 33% of SingTels mobile ARPUs during the quarter ending March 08. Moreover,

given that Singapore is a WCDMA market where 60% of SingTels postpaid subs are using 3G phones, a 3G WCDMA iPhone would be

particularly well received.

Q: What is the update with the KPPU and the court decision in Indonesia regarding SingTel and Temasek?

A: SingTel does not agree with the KPPU decision and has appealed the decision to the Indonesian Supreme Court. It is unclear how

long it will take for the court to make a decisionit could take from two months to two years for the Supreme Court to make a finaljudgment in this matter.

Q: What about competition in the Indonesian wireless market?

A: Although Indosat has improved its coverage outside of Java, Telkomsel still has the best wireless network in Indonesia. SingTelindicated that it remains difficult for the competitors to build out coverage to the many islands of Indonesia especially given the poor

telephone and electrical infrastructure in these areas. However, competitors have improved coverage and SingTel expects the wireless

pricing pressure in the Indonesian market to be worse during the next 12 month period. In fact, SingTels guidance for its associates

earnings growth during FY09 is lower than for FY08partially as a result of increased competition in the Indonesian market.

Q: What is SingTels mobile strategy ahead of the introduction of mobile number portability in June?

A: SingTel reported 244K net adds during 4Q 08 (ending March 08) due to the companys focus on securing subscribers ahead of theintroduction of MNP in June. By the end of March, the company had signed over 80% of its contract subscribers up for new contractsand will continue to focus on securing these existing customers ahead of MNP. As a result, the company expect mobile acquisition

costs to continue to be high during 1Q 09. The other two carriers are also spending more on acquisition costs to secure their sub bases

as well. SingTel currently has about a 45% postpaid market share (versus around 30% each for Starhub and M1) in Singapore and

hopes to maintain this level to keep competition from becoming too aggressive.


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Q: What is SingTels strategy regarding MioTV (IPTV) in Singapore?

A: SingTel currently has about 44K MioTV subs (2% of the market) after introducing the service in July 2007. SingTels management

believes that there is room in the market for more than one operator for the S$250 mn pay-TV market in Singapore. Most of the 44KMioTV customers have both Starhub and SingTels pay-TV service. Given that there is still a significant amount of exclusive TV content

and it will take two to three years before some of that content is up for renewal, SingTels management recognizes the challenges it

faces to break into this market. However, given that SingTel has a 54% broadband market share, the company believes that it will be

able to attract some of these customers to its MioTV service as more compelling TV content becomes available over time. SingTel hasalready secured exclusive rights to broadcast Champion League Soccer.

Q: Why will capex in Singapore increase to mid-teens percentage of revenues for FY09?

A: SingTel will spend more to improve its mobile network capacity given the stronger subscriber growth. The company also intends tospend more on its 3G network to improve the data speed to 14 MB by the end of the year. Moreover, SingTel needs to spend more on

its fixed-line broadband network to improve transmission speeds for IPTV and broadbandto better compete against Starhub.

Q: What is the timing for the FTTH national broadband network in Singapore?

A: SingTel has a 30% equity-interest in a consortium that is bidding for the network build out for the national broadband network. The

winning consortium would be eligible to receive up to S$750 mn to help build out this network. A decision on which bidder would build

out the network is likely to be made by August/September. SingTel indicated that its Singapore capex might need to be increaseddepending on if the SingTel consortium wins this bid.

Q: What is Optus strategy to compete against Telstra?

A: On the mobile side, the company has decided to increase capital expenditures to improve its 3G coverage to 98% populationcoverage by December 09. Optus had 68% at the end of March 08 and plans to increase this to 96% by the end of December 08. The

final 2% incremental coverage will take an additional 12 months given that it would be in areas that Optus does not currently provide

mobile coverage in these areas. Optus management admits that Telstra has been able to take advantage of this coverage discrepancy

to gain more high-end subscribers who place a higher value on network coverage.

Optus is also continuing to focus on capped plans (which represented 36% of its postpaid subs by March 08). Optus believes that

these bucket plans will encourage more fixed-to-mobile substitution in Australiawhich will help the company gain share in the overall

telephony market against Telstra. Most of these subs on cap plans are on two-year contracts.

Q: What is the update on fiber to the node (FTTN) contract in Australia?

A: The new government in Australia has indicated that potential bidders for the FTTN contract would be given 12 weeks from the time

that Telstra provides the detailed information required for the bidders to make an optimal bid decision. Optus views this decision as apositive for its G9 consortium. However, it will still need to evaluate the economics of any bid to make sure that the governments $4.7

bn support would make economic sense.

Figure 1: Sum of the Parts valuation for SingTel

Source: Lehman Brothers estimates


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Analyst Certification:

I, Paul Wuh, hereby certify (1) that the views expressed in this research Company Note accurately reflect my personal views about any

or all of the subject securities or issuers referred to in this Company Note and (2) no part of my compensation was, is or will be directly

or indirectly related to the specific recommendations or views expressed in this Company Note.

Company Description:

SingTel is the incumbent telco in Singapore, and holds a basket of stakes in leading regional cellular operators, plus it owns Optus,Australia's number two cellular and fixed line operator.


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Important Disclosures:

SingTel (STEL.SI) SGD 3.81 (30-May-2008) 1-Overweight / 1-Positive

Rating and Price Target Chart:

Currency=SGD

Date Closing Price Rating Price Target

06-Oct-07 4.02 4.5013-Sep-07 3.68 4.3014-Aug-07 3.50 4.1009-Jul-07 3.46 4.0019-Jan-07 3.40 3.9016-Jan-07 3.48 3.45

Date Closing Price Rating Price Target

07-Dec-06 2.98 3.2308-Nov-06 2.85 3.1518-Oct-06 2.50 3.0026-Sep-05 2.61 3.2626-Sep-05 2.61 1 -Overweight05-May-05 2.74 2.79

FOR EXPLANATIONS OF RATINGS REFER TO THE STOCK RATING KEYS LOCATED ON THE PAGE FOLLOWING THE LAST PRICE CHART.

Lehman Brothers Inc. and/or an affiliate trade regularly in the shares of SingTel.

Valuation Methodology: We value Singtel using a sum-of-the-parts and discounted-cash-flow methodology. We base its associatestakes in Bharti, Telkomsel and AIS at our target price. We value its local business on DCF with 8% WACC and 0.5% TGR. We valueOptus on DCF with 8.0% WACC and 1% TGR.

Risks Which May Impede the Achievement of the Price Target: The Australian mobile phone business is getting increasinglycompetitive, with Voda and Hutch keen for users. This could lead to Optus earnings not reaching our estimate of flatness over the nextfew years.


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Important Disclosures Continued:The analysts responsible for preparing this report have received compensation based upon various factors including the firm's totalrevenues, a portion of which is generated by investment banking activities.

With the exception of analysts who publish for either LBI or a branch of LBI, research analysts may not be associated persons of themember and therefore may not be subject to Rule 2711 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst account.

Company Name Ticker Price (30-May-2008) Stock / Sector Rating

SingTel STEL.SI SGD 3.81 1-Overweight / 1-Positive

Guide to Lehman Brothers Equity Research Rating System:Lehman Brothers coverage analysts in Asia (ex Japan) use a relative rating system in which they rate stocks as 1-Overweight, 2- Equalweight or 3-Underweight (see definitions below) relative to the country index of the country in which a stock is listed.

In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutralor 3-Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system.Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratingsalone.

Stock Rating1-Overweight - The stock is expected to outperform the unweighted expected total return of the relevant country index over a 12-monthinvestment horizon.2-Equal weight - The stock is expected to perform in line with the unweighted expected total return of the relevant country index over a12- month investment horizon.3-Underweight - The stock is expected to underperform the unweighted expected total return of the relevant country index over a 12-month investment horizon.RS-Rating Suspended - The rating and target price have been suspended temporarily to comply with applicable regulations and/or firm

policies in certain circumstances including when Lehman Brothers is acting in an advisory capacity in a merger or strategic transactioninvolving the company.

Sector View1-Positive - sector coverage universe fundamentals/valuations are improving.2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating.3-Negative - sector coverage universe fundamentals/valuations are deteriorating.

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SingTel 02 june 08 Lehman

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