20110711 telecommunications dbsv

8/6/2019 20110711 Telecommunications DBSV

1/14

www.dbsvickers.com

Refer to important disclosures at the end of this reported: MY / sa: YM

STI : 3,117.37AnalystSachin MITTAL +65 6398 [email protected]

Source: DBS Vickers

StarHub - Our new top pick offers (i) over 7% yieldbased on annual 20 Scts DPS and (ii) mid-single digitgrowth in FY12F from lower handset subsidy costs.

SingTel HOLD for (i) 5.5% yield based on 70%payout ratio and (ii) mid-single digit growth prospectsin FY13F (March YE).

M1 Downgrade to HOLD after its recentoutperformance. (i) 6-7% yield is the key attractionbased on 80%-100% payout ratio. (ii) Expect flatearnings in FY12F due to fair value accounting.

TOP PICKS

Price Mkt Cap Target PriceS$ US$m S$ Rating

SingTel 3.17 41,171 3.20 HOLDStarHub 2.79 3,900 3.05 BUYM1 2.59 1,923 2.60 HOLD

Handset revenue minus handset costs (S$m). Fair value

accounting at M1 led to lower subsidy costs

Source: DBS Vickers, quarterly results of companies

DBS Group Research . Equity 12 Jul 2011

Singapore Industry Focus

Singapore Telecom Companies

2Q11F Preview and key sector issues 2Q11F earnings of StarHub & M1 are likely to

reinforce sectors appeal as bastion of stability.

Potential decline in smartphone sales in 2H11F tobenefit StarHub more; Downgrade M1 to HOLD afterits recent run-up.

Cross-carriage to start from Aug 1, but may not havesharp teeth to make a difference.2Q11F earnings should reaffirm sectors defensiveappeal. M1 is likely to report 2Q11 earnings of S$42.5m(0% QoQ, +4% YoY) on 14

thJuly, as its fair value

accounting may not leave much scope for improvement.

StarHub is likely to report 2Q11 earnings of S$74m (+7%

QoQ, +27% YoY) on 4th

August in a seasonally strong 2Q

as it recovers from the impact of dunning in 1Q11.

Potential decline in smartphone sales in 2H11F &FY12F may benefit StarHub. High penetration of smart

phones (60-65%) in Singapore may imply lowersmartphone sales in 2H11F, implying lower subsidy burden

at StarHub & SingTel. Lower smartphone sales, on the

other hand, may adversely impact M1s earnings due to its

unique practice of fair value accounting. While M1 is a key

beneficiary of National Broadband Network, it may take

another 2-3 years to show significant profit contribution

from the new business.

StarHub is our new top pick after M1s recentoutperformance. YTD total returns are 15% for M1 (ourprevious top pick) versus 11% for StarHub and 1% for

STI. At current price, M1 offers 6-7% dividend yield basedon 80-100% payout ratio vs assured 7% for StarHub. MI

offers flat earnings in FY12F versus mid-single digit growth

at StarHub.

Cross-carriage to start from Aug 1, but impact may bemuted. Cross-carriage applies only to the exclusivecontent signed after Mar 12, 2010. Firstly, StarHub has

locked-in most of the popular content on exclusive basis

before Mar 12 for 3-5 years. Secondly, content can still be

signed on non-exclusive basis where pay TV operators

negotiate the price as opposed to bidding earlier. As long

as other pay TV operators do not buy non-exclusive

content rights, they would not be able to cross-carry thosecontents.

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M1 StarHub


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Industry Focus


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Analyst

Sachin MITTAL +65 6398 [email protected]

Table of Contents

M1s 2Q11F earnings preview 3

StarHubs 2Q11 earnings preview 3

Three Key Industry Issues 4

(i) Smartphones & Tablets(ii) National Broadband Network(iii) Cross-carriage of content

Concerns for M1 in the mobile segment 5

Why we like StarHub? 7

Sector Valuation 7

Peers Valuation 8

Stock ProfilesM1 9


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M1s 2Q11F earnings preview

M1 is likely to report 2Q11 earnings of S$42.5m, flat

sequentially. While 2Q is a seasonally strong quarter, fair

value accounting may offset the actual sequential increase in

service revenue as a significant portion is already recognized as

handset revenue at the start of the two-year contract.

M1s 2Q11F Earnings Estimates

Source: DBS Vickers

StarHubs 2Q11 earnings preview

StarHub is likely to report 2Q11 earnings of S$74m, up 8%

qoq on 4th

Aug, thanks to sequential improvement in mobile

revenue. 2Q results should be in line with consensus.

StarHub lost 5K postpaid subscribers in 1Q11 due toDunning. Dunning refers to churn initiated by StarHubfor non-paying customers subsequent to the

implementation of business support system in 4Q10.

Management expects postpaid mobile subscriber to

resume growing in 2Q11F, as the impact of dunning

should be over in 1Q11.

Recovery from seasonally weak 1Q. This is due to theimpact of lesser number of days (Feb month of 28 days

only) and the impact of Chinese New Year holidays in

1Q. In the past, mobile revenue improved sequentially

in 2Q from higher usage. The only exception was 2008,

which was impacted by intense price competitionahead of mobile number portability.

StarHubs 2Q11F Earnings Estimates

Source: DBS Vickers

FYE Dec S$m 2Q10 1Q11 2Q11F y-o-y q-o-q Comments

Operating Rev 223 258 255 14% -1%Likley to be higher

on annual basis due

to higher handset

sales. Service

Revenue should be

stable

Operating Expens (173) (205) (202) 17% -1%Supported by lower

depreciation and

leased circuit costs

Other revenue 1 0 0 -80% 0%Operating Profit 51 53 53 4% 0%Finance Costs (2) (1) (2) 0% 7%PBT 50 52 52 4% 0%Tax (9) (9) (9) 5% 1%Net Profit 41 43 43 4% 0%

FYE DecS$'m 2Q10 1Q11 2Q11F y-o-y q-o-q Comments

Opg Rev. 569 559 56 7 0% 2%Lower revenue on

annual basis due

to lower pay TV

revenue

subsequent to

loss of EPL rights.

Opg Exp -492 -471 -476 -3% 1% iPhone subsidymay continue tobe high

Other

income1 3 3 To account forcash payment

received from

Govt for OpCo

Opg

Profit/

(loss)

78 91 95 22% 5%Interest

Income1 0 0 -75% 0%

Interest

exp-7 -5 -5 -29% 0%

PBT 72 86 90 26% 5%Tax -14 -17 -1 6 20% -3%PAT 58 69 74 27% 7%


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Three Key Industry Issues

(i) Smartphones & Tablets High smartphone penetration implies slower sales

ahead. Smartphone penetration is estimated to reachover 60% of postpaid subscriber base and may rise

gradually from here due to high ARPU commitment

required for smartphone plans. Most handset users

made the transition in 2010 and are now locked in

two-year contracts. Moreover, smartphone adoption is

unlikely to breach 80% as there is still a large pool of

users, such as the elderly, who are resistant to the

switch. Telcos require four to eight months to recoup

subsidies for each smartphone, and this should happen

in 2011F & 2012F.

iPad & Tablet is a small incremental opportunity.Singapore telcos have started to offer tablets at upfront

subsidy of S$400-500 per iPad in lieu of subscription

fee of S$40/month. We believe that while breakeven

time is over 10 months for tablets, it is still an

incremental opportunity. However, the initial impact on

earnings would be negative on all the three telcos

(including M1 as tablets are not covered under fair

value accounting). We believe the market for tablets is

much smaller than phones as (i) there can only be one

or two tablets per household versus multiple phones

per household, (ii) many households may not buy

tablets as they have iPhones already (iii) each tablet

subscription would contribute much lower profit than

phone, due to lower monthly subscription fee.

(ii) National Broadband Network

Home Reached is significantly lower than HomePassed. Around 60% of the residential andcommercial properties achieved Home Passedstatus at the end of 2010. However, Home

Reached percentage is much lower and is behind its

60% target. M1 revealed that there are only around

16k fiber customers in Singapore in total with M1

having one-third share of this new segment. With

1.2m broadband customers, there are mere 1.3%

fiber customers despite 60% coverage. This can be

attributed to (i) high incremental cost of upgrading

to fibre from existing broadband players and (ii)

external trunking requirement may be undesirable

for many homeowners.

Home Passed hit 60% at the end of 2010

Source: OpenNet

New broadband earnings may constitute ~10% ofexisting earnings base for M1 in the long term. M1targets 20%-30% market share in the broadband

market by 2015. With current broadband customer

base of 1.2m, which is likely to grow further, it

implies an approximate target of over 250-300K

broadband subscribers by 2015. Based on an

estimated broadband ARPU of S$50 per month,

annual revenue should be S$150m. Due to the

presence of multiple retailers, we assume 10% net

profit margin in the broadband business (versus 20%

in the mobile), translating to annual earnings

potential of S$15m from broadband segment. This

does not include any contribution from enterprise

segment, as it may be harder to penetrate for a new

entrant. Overall, new broadband earnings may

constitute c.10% of existing base in our view,

however, we believe that M1 would need 2-3 yearsto be profitable in broadband business. In addition

to its lack of scale, there is also the need to offer

aggressive price discounts for its lack of pay TV

offerings and additional cost of international

bandwidth.

M1 is the most aggressive player in terms of pricingas anticipated. M1 offers 100 Mbps connection atS$59/month versus S$87/month at StarHub. We

need to keep in mind that S$21/mth is the regulated

fee to be paid to OpCo and then there are othercosts such as billing, installation and international

bandwidth costs, which could amount to another


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S$25-30 in our view. During some of its promotions

in 2Q11, M1 offered S$29/mth 100Mbps plans, wellbelow the offerings from both StarHub and SingTel.

Most of the players are promoting 50 Mbps

connections at monthly subscription fee of S$49,

S$65 and S$67 by M1, SingTel and StarHub

respectively.

StarHub expects SME & enterprise gains to morethan offset consumer losses. Management believesthat small and medium enterprises (SMEs) are the

low hanging fruits with relatively shorter decision

cycle than enterprise customers. In the enterprise

segment, StarHub sees an opportunity as a backup

service provider to SingTel as more organizations are

looking for redundancy plans. We believe that it may

take StarHub a couple of years to position itself as an

alternative to SingTel as track record is very

important for enterprise customers.

(iii) Cross-carriage of content for pay TV

From Aug 1, cross-carriage kicks in, but can be bypassed fornon-exclusive content. The Media DevelopmentAuthority's (MDA) mandate, announced in March last year,

will apply to any exclusive content that operators have

acquired on or after March 12, 2010. The regulation assertsthat pay-TV operators must be able to make available this

content within five days of request from the consumer, even

if they belong to competitors. However, the catch is that

cross-carriage applies only to the exclusive content. We

are afraid that most of the content in the future can be

signed on non-exclusive basis where pay TV operators

negotiate the price with content provider on a bilateral

basis. Recently, StarHub signed a deal to screen the ongoing

European Under-21 championship on a non-exclusive basis -

bypassing the much-publicised cross-carriage measure.

Currently, English Premier League (EPL) rights are awarded

on an exclusive basis, so next round of rights would becovered under the cross-carriage regulation unless they are

awarded on non-exclusive basis. In either case, the cost of

content should not rise too much while content ownership

may continue to be a competitive advantage for existing

pay-TV operators.

Concerns for M1 in the mobile segment

iPhone has helped M1 to raise market share and postpaid

mobile ARPU. However, high handset subsidies are not

reflected in its past earnings due to its use of fair value

accounting. This may have an adverse impact on FY11F &

FY12F earnings.

Postpaid mobile market share has improved for SingTel andM1. SingTel & M1 have aggressively promoted iPhoneswhile StarHub has focused more on the cheaper Android

phones due to high subsidy required on iPhones. This

resulted in SingTel and M1 gaining market shares in the

post-paid mobile segment as iPhone continues to be the

most popular phone in Singapore to-date.

SingTel & M1 have gained postpaid mobile market

share over the last one-year

Source: DBS Vickers, Quarterly results of companies

M1 has seen most improvement in post paid mobile

ARPU (non adjusted)


M1 has benefited from low ARPU base. Most of M1sexisting subscribers were not eligible to get iPhone subsidy

on their existing plans and had to upgrade to higher-end

plans, resulting in higher ARPU. As for SingTel and StarHub,

most of their subscribers (already high-end) were eligible toget iPhone subsidies on their existing plans and merely

46.3 46.0 45.8 45.7 45.846.5

27.3 27.5 27.7 27.9 27.6 26.826.5 26.626.426.526.4 26.7

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substituted voice with data. As such, ARPU uplift has been

insignificant at SingTel and StarHub.

The use of fair value accounting at M1 may have an adverseimpact on FY11F/12F earnings. Under fair value accounting,M1 recognizes handset revenue at the cost of future service

revenue, leading to lower handset subsidy costs. Basically,

the additional service revenue over the contract period,

attributed to the handset, is recognized upfront as handset

revenue a practice unique to M1. This practice boosted

M1s past earnings at the cost of future earnings. Investors

should keep in mind that FY11F benefit from (i) reduction of

S$15-18m in operating costs due to lower depreciation and

leased circuit costs and (ii) significant handsets revenue due

to high demand for smartphones. With smartphone

penetration exceeding 60% in Singapore, smartphone sale

is likely to slowdown in FY12F, resulting in an adverse

impact on M1s handset revenue while cost savings may not

be significant either.

Fair value accounting at M1 led to lower subsidy costs

(Handset revenue minus handset costs, S$m)


Fair value accounting at M1 has an adverse impact onpostpaid mobile service revenue (S$m)


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Why we like StarHub?

Cash payment from regulator to support dividendsManagement does not rule out further capital

management over the next 18 months in addition to

20 Scts DPS. Besides, healthy free cash flow

generation of S$300m-S$350 from operations in

FY11F-12F, StarHub may receive total cash payment

of S$40-60m from the regulator over the next three

years on achieving certain milestones as OpCo for

National Broadband Network. StarHub had received

its first payment of S$60m from the regulator last

year.

Significant mobile traffic cost savings to drive FY11Fearnings. Since 4Q10, traffic costs have declined byS$5m each quarter as StarHub negotiated lower

costs per minute for certain international destinations

with its carrier partners. The tactic, we believe, here

is to barter IDD minutes with another carrier who has

substantial incoming calls (to Singapore in this case).

As a result, traffic cost is incurred only for certain IDD

minutes above those bartered by the two carriers.

This move could result in significant savings of S$15-

20m in traffic costs in FY11F, more than 5% of

expected earnings for FY11F.

Lower handset subsidy costs to drive FY12F earnings.While Android phone adoption has been slow in

Singapore till now, we expect Android phones to

emerge as popular alternatives to iPhones in 2012F

and beyond. This should lower subsidy burden on

StarHub in FY12F in our view.

Higher pay TV fee to benefit FY11F & FY12F. Pay TVrevenue has stabilized in 1Q11 and annual decline in

pay TV revenue is estimated to be less than S$40m,

still lower than the cost savings of S$60-70m from

not owning the EPL rights. In fact, Pay TV subscriberbase increased by 4K to 542K in 1Q11 reflecting

StarHubs ability to manage its pay TV business.

Besides, StarHub has managed to raise its pay TV

monthly subscription rate by S$2/month from Aug

onwards, which should result in additional revenueof S$6m and S$13m in FY11F and FY12F

respectively, most of which should flow to the

bottom line.

Sector Valuation

Downgrade M1 to HOLD. YTD total returns of15% for M1 (our previous top pick) versus 11%

for StarHub & 1% for STI. Based on 80-100%

payout ratio, dividend yield of 6-7% is decent but

not the best among the three telcos. The lack ofearnings growth in FY12F due to fair value

accounting is our biggest concern. No change to

our DCF-based target price of S$2.60 (WACC:

8.4%, terminal growth 0%).

Maintain BUY on StarHub. StarHub offers assureddividend yield of 7% based on annual DPS of 20

Scts DPS, which is sustainable over the next three

years, in the managements view. In addition,

StarHub may grow by 4-5% in 2012F on top pf

17% earnings growth in FY11F, on declining

handset subsidy costs. No change to our DCF-based target price of S$3.05 (WACC: 8.4%,

terminal growth 0%) Maintain HOLD for SingTel. Based on 70% payout

ratio, dividend yield of 5.5% is decent but not

attractive given mid-single digit earnings growth

prospects in FY13F (March YE). We believe,

SingTel needs to raise payout ratio over 80% in

order to offer over 6% yield, in the face of low

growth prospects. Next capital management may

be three years away after special DPS of 10 Scts

with FY11 results. No change to SOTP based TP ofS$3.20.


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Industry Focus


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Peers ValuationMkt Mkt Price Target Avg CAGR

Company FYE Cap Cap (S$) Price % 6-mth 10-12 P/BV(US$m) LC 08-Jul (S$) Upside Rcmd Vol (m) (%) 11F 12F 11F 12F 10A 10A 11F 12FChina / Hong Kong 23,668China Mobile Dec 190,290 1,480,934 73.80 74.00 0% Hold 21.7 3 9.9 9.7 4.3% 4.4% 2.1x 4.0x 3.7x 3.3x

China Telecom Dec 8,827 68,693 4.95 5.20 5% Buy 70.3 20 19.6 15.0 1.7% 1.7% 1.4x 5.0x 4.7x 4.0x

China Unicom Dec 48,199 375,110 15.92 18.00 13% Buy 42.0 66 58.1 31.0 0.6% 0.6% 1.5x 6.3x 5.6x 4.7x

1,924,737 7 10.9 10.1Malaysia 1,595Digi.Com Dec 7,796 23,325 30.00 30.40 1% Hold 0.6 -5 23.1 22.2 5.4% 5.4% 17.3x 9.8x 9.0x 8.2x

Maxis Bhd Dec 13,788 41,250 5.50 5.10 -7% Hold 2.8 6 17.0 16.0 5.9% 6.2% 4.8x 10.4x 9.8x 9.5x

Telekom Dec 4,795 14,345 4.01 3.90 -3% Hold 7.1 4 25.5 23.7 4.9% 4.9% 1.9x 5.7x 6.2x 6.2x

Axiata Group Dec 14,275 42,709 5.05 5.60 11% Buy 15.2 15 14.3 12.6 2.5% 2.8% 2.3x 6.4x 5.6x 4.9x

121,629 8 17.4 15.9Singapore 3,151M1 Dec 1,923 2,348 2.59 2.60 0% Hold 1.0 3 13.8 14.0 7.2% 7.2% 8.0x 8.5x 8.5x 8.5x

SingTel Mar 41,642 50,837 3.19 3.20 0% Hold 19.7 5 12.8 12.0 5.9% 5.8% 2.1x 7.7x 7.4x 7.1x

Starhub Dec 3,933 4,801 2.80 3.05 9% Buy 1.9 10 15.5 14.9 7.1% 7.4% 88.5x 9.0x 8.1x 7.8x

57,986 5 13.1 12.3Thailand 925Advanced Info Service Dec 10,822 327,040 110.00 121.71 11% Buy 5.1 4 14.2 13.6 6.8% 7.1% 7.9x 6.6x 6.3x 5.9x

Tota l Access Communica Dec 4,427 133,781 56.50 62.49 11% Buy 6.4 1 11.5 12.6 8.7% 7.9% 1.9x 5.2x 4.8x 4.8x

True Corporation Dec 1,824 55,112 3.80 4.51 19% Valued 113.3 nm 90.5 65.3 0.0% 0.0% 3.6x 5.5x 5.4x 5.5x

515,934 3 38.7 30.5Indonesia 4,004Indosat Dec 3,285 27,984,760 5,150 7,000 36% Buy 2.5 28 22.9 16.1 2.2% 3.1% 1.6x 5.3x 4.9x 4.4x

PT Telekom Dec 17,039 145,152,000 7,200 7,700 7% Hold 18.4 7 11.4 10.8 4.8% 5.1% 3.5x 4.4x 4.4x 4.2x

XL Axiata Dec 6,200 52,815,109 6,200 7,100 15% Buy 4.5 20 13.8 12.0 3.6% 4.2% 4.5x 6.7x 5.8x 5.1x

PT Sarana Menara Dec 1,317 11,223,212 11,000 15,000 36% Buy 0.0 na 68.7 28.3 0.0% 0.0% 8.7x 14.0x 11.6x 9.5x

Tower Bersama Dec 1,310 11,163,915 2,450 2,700 10% Buy 3.4 89 26.3 19.2 0.0% 0.0% 5.2x 24.2x 16.8x 13.3x

* PT Telkom is adjusted for SingTel's 35% stake in Telkomsel

Singapore Telecom 11 & 12 earnings respectively

Source: DBS Vickers

PE (x) EV/EBITDAividend Yield (%)


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www.dbsvickers.com

Refer to important disclosures at the end of this reported: MY / sa: YM

HOLD S$2.59 STI : 3,117.37(Downgrade from BUY)

Price Target : 12-Month S$ 2.60Reason for Report : Change in recommendationPotential Catalyst: Half yearly dividendsDBSV vs Consensus : Street is too optimistic on FY12F earnings,disregrading the impact of fair value accounting perhapsAnalystSachin MITTAL +65 6398 [email protected]

Price Relative

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R e l a t i v e I n d e xS $

M 1 ( L H S ) R e la t i v e S T I IN D E X ( R H S )

Forecasts and Valuation

FY Dec (S$ m) 2009A 2010A 2011F 2012FRevenue 781 980 970 980EBITDA 302 309 313 313Pre-tax Profit 181 190 204 203Net Profit 150 158 170 167Net Pft (Pre Ex.) 145 158 170 167EPS (S cts) 16.9 17.5 18.8 18.5EPS Pre Ex. (S cts) 16.3 17.5 18.8 18.5EPS Gth Pre Ex (%) (3) 7 8 (1)Diluted EPS (S cts) 16.8 17.5 18.7 18.5Net DPS (S cts) 13.5 17.5 18.8 18.5BV Per Share (S cts) 27.5 32.2 33.5 33.3PE (X) 15.3 14.8 13.8 14.0PE Pre Ex. (X) 15.9 14.8 13.8 14.0P/Cash Flow (X) 10.4 12.5 9.5 9.0EV/EBITDA (X) 8.4 8.5 8.5 8.5

Net Div Yield (%) 5.2 6.7 7.2 7.2P/Book Value (X) 9.4 8.0 7.7 7.8Net Debt/Equity (X) 1.0 1.0 1.0 1.1ROAE (%) 65.6 58.9 57.2 55.6

Earnings Rev (%): (0.1) (2.7)Consensus EPS (S cts): 18.7 20.0Other Broker Recs: B: 11 S: 3 H: 6ICB Industry :TelecommunicationsICB Sector: Mobile TelecommunicationsPrincipal Business: MobileOne is one of the maintelecommunication operators in Singapore.

Source of all data: Company, DBS Vickers, Bloomberg

At A Glance Issued Capital (m shrs) 906Mkt. Cap (S$m/US$m) 2,348 / 1,913Major Shareholders

Axiata Group (%) 29.3Keppel T&T Ltd (%) 19.7Singapore Press Holdings (%) 13.7

Free Float (%) 37.3Avg. Daily Vol.(000) 805

Singapore Company Focus

M1Bloomberg: M1 SP | Reuters: MONE.SI

Fair value accounting versus NBN

YTD total returns of 15% for M1 vs 11% for StarHub &1% for STI.

FY12F mobile earnings at risk due to fair valueaccounting while non-mobile contribution may not besignificant.

Downgrade to HOLD at unchanged DCF based (WACC8.4%, terminal growth 0%) TP of S$2.60

FY12F mobile earnings at risk. Under fair value accounting(FVA), additional service revenue over the contract periodattributed to the smartphone is recognized upfront ashandset revenue a practice unique to M1. This practiceboosted M1s past earnings at the cost of future earnings.Investors should keep in mind that FY11F benefits from (i)reduction of S$15-18m in operating costs due to lowerdepreciation and leased circuit costs and (ii) significanthandsets revenue due to high demand for smartphones. Withsmartphone penetration exceeding 60% in Singapore,smartphone sale is likely to slowdown in FY12F. This may

have an adverse impact on M1s handset revenue and nomajor cost savings are expected either.

Non-mobile contribution may be insignificant in FY12F.Overall, broadband may contribute S$15-16m of earnings byFY15F. However, it may take over 2 years to reap significantprofit from the broadband business. M1 needs to offer higherprice discounts for its broadband service due to the lack ofpay TV offering. Margins would also be affected by additionalcost of leasing international bandwidth and the lack of scale.

Potential half yearly DPS of 6.5 Scts priced in. Althoughofficial dividend policy is minimum 80% payout ratio, we

project M1 to maintain 100% payout in 2011F despite lowerfree cash flow than earnings due to FVA.


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Company Focus

M1

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Segmental BreakdownFY Dec 2009A 2010A 2011F 2012F 2013FRevenues (S$ m)

Post Paid Cellular 495 502 524 523 519Pre Paid Cellular 70 77 86 95 117IDD Revenue 131 129 128 126 124Equipment Sales 86 271 233 236 239

Total 781 980 970 980 999Income Statement (S$ m)FY Dec 2009A 2010A 2011F 2012F 2013FRevenue 781 980 970 980 999

Other Opng (Exp)/Inc (119) (114) (105) (105) (106)

Operating Profit 183 194 209 208 207Other Non Opg (Exp)/Inc 0 0 0 0 0

Associates & JV Inc 0 0 0 0 0

Net Interest (Exp)/Inc (8) (4) (4) (5) (5)Exceptional Gain/(Loss) 6 0 0 0 0Pre-tax Profit 181 190 204 203 202Tax (31) (32) (35) (36) (35)Minority Interest 0 0 0 0 0

Preference Dividend 0 0 0 0 0

Net Profit 150 158 170 167 167Net Profit before Except. 145 158 170 167 167

EBITDA 302 309 313 313 313

GrowthRevenue Gth (%) (2.3) 25.4 (1.0) 1.0 2.0

EBITDA Gth (%) (3.5) 2.1 1.5 0.0 0.1

Opg Profit Gth (%) (4.7) 6.0 7.3 (0.3) (0.3)

Net Profit Gth (%) 0.6 4.8 7.5 (1.2) (0.3)

Margins & RatioOpg Profit Margin (%) 23.5 19.8 21.5 21.2 20.7

Net Profit Margin (%) 19.2 16.1 17.5 17.1 16.7

ROAE (%) 65.6 58.9 57.2 55.6 55.6

ROA (%) 18.4 17.6 17.2 16.4 16.4

ROCE (%) 25.8 25.0 24.3 23.1 23.1

Div Payout Ratio (%) 80.0 100.0 100.0 100.0 100.0

Net Interest Cover (x) 24.2 44.9 48.1 43.0 42.9Source: Company, DBS Vickers

Margins Trend

15.0%

16.0%

17.0%

18.0%

19.0%

20.0%

21.0%

22.0%

23.0%

24.0%

25.0%

2009A 2010A 2011F 2012F

OperatingMargin% Net IncomeMargin%

Surged because M1started to apply fair valueaccounting from FY10onwards

Our own estimate,

although official policy isminimum 80% payout


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Company Focus

M1

Page 11

Balance Sheet (S$ m)FY Dec 2009A 2010A 2011F 2012F 2013FNet Fixed Assets 612 598 609 617 620

Invts in Associates & JVs 0 0 0 0 0

Other LT Assets 83 83 83 83 83

Cash & ST Invts 7 9 31 9 3Inventory 8 10 10 10 10Debtors 120 253 281 297 303Other Current Assets 3 3 3 3 3Total Assets 834 956 1,018 1,019 1,023ST Debt 0 0 0 0 0

Other Current Liab 224 274 274 278 282

LT Debt 250 297 347 347 347

Other LT Liabilities 115 94 94 94 94

Shareholders Equity 245 291 302 300 300Minority Interests 0 0 0 0 0Total Cap. & Liab. 834 956 1,018 1,019 1,023Non-Cash Wkg. Capital (92) (8) 20 33 34

Net Cash/(Debt) (243) (288) (316) (338) (344)Debtors Turn (avg days) 46.9 69.5 100.5 107.7 109.5Creditors Turn (avg days) 197.5 142.2 158.8 156.2 153.6Inventory Turn (avg days) 8.4 6.0 6.7 6.6 6.5Asset Turnover (x) 1.0 1.1 1.0 1.0 1.0Current Ratio (x) 0.6 1.0 1.2 1.2 1.1Quick Ratio (x) 0.6 1.0 1.1 1.1 1.1Net Debt/Equity (X) 1.0 1.0 1.0 1.1 1.1Net Debt/Equity ex MI (X) 1.0 1.0 1.0 1.1 1.1Capex to Debt (%) 48.0 33.7 33.5 32.5 31.7

Z-Score (X) 3.3 4.0 4.0 4.0 NA

Cash Flow Statement (S$ m)FY Dec 2009A 2010A 2011F 2012F 2013FPre-Tax Profit 181 190 204 203 202

Dep. & Amort. 119 114 105 105 106

Tax Paid (35) (31) (32) (35) (36)

Assoc. & JV Inc/(loss) 0 0 0 0 0

Chg in Wkg.Cap. (44) (86) (31) (13) (1)

Other Operating CF 0 0 0 0 0Net Operating CF 221 188 246 260 272Capital Exp.(net) (120) (100) (116) (113) (110)

Other Invts.(net) (14) (20) 0 0 0

Invts in Assoc. & JV 0 0 0 0 0

Div from Assoc & JV 0 0 0 0 0

Other Investing CF 0 0 0 0 0Net Investing CF (134) (120) (116) (113) (110)Div Paid (120) (120) (158) (170) (167)

Chg in Gross Debt 0 47 50 0 0

Capital Issues 0 9 0 0 0

Other Financing CF 22 (1) 0 0 0Net Financing CF (97) (66) (108) (170) (167)Currency Adjustments 0 0 0 0 0

Chg in Cash (10) 2 22 (22) (6)

Opg CFPS (S cts) 29.8 30.3 30.6 30.3 30.2Free CFPS (S cts) 11.4 9.7 14.3 16.3 17.9Source: Company, DBS Vickers

Asset Breakdown (2010)

Debtors -29.1%

Net FixedAssets -68.7%Associates'/J

Vs 0.0%

Bank, Cashand Liquid

Assets -1.0%

Inventory -1.2%

Capital Expenditure

0

20

40

60

80

100

120

140

2009A 2010A 2011F 2012F

Capital Expenditure (-)

Assuming S$95mcapex and S$22m paidfor spectrum.


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Company Focus

M1

Page 12

Quarterly / Interim Income Statement (S$ m)

FY Dec 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011Revenue 249 223 246 262 258

Other Oper. (Exp)/Inc (27) (28) (30) (29) (25)Operating Profit 49 51 49 48 53Other Non Opg (Exp)/Inc 0 0 0 0 0

Associates & JV Inc 0 0 0 0 0

Net Interest (Exp)/Inc (2) (2) (1) (1) (1)

Exceptional Gain/(Loss) 0 0 0 0 0Pre-tax Profit 48 50 48 46 52Tax (9) (9) (8) (8) (9)

Minority Interest 0 0 0 0 0Net Profit 39 41 39 39 43Net profit bef Except. 39 41 39 39 43

EBITDA 80 80 79 48 53

GrowthRevenue Gth (%) 15.2 (10.4) 10.1 6.8 (1.8)

EBITDA Gth (%) 3.0 4.5 (0.8) (39.6) 10.7

Opg Profit Gth (%) 6.9 3.2 (3.5) (2.8) 10.7Net Profit Gth (%) 6.2 3.6 (3.4) (2.0) 10.1

MarginsOpg Profit Margins (%) 19.8 22.9 20.0 18.2 20.5

Net Profit Margins (%) 15.8 18.3 16.0 14.7 16.5

Margins Trend

0%

5%

10%

15%

20%

25%

30%

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

OperatingMargin% Net IncomeMargin%

Source: Company, DBS Vickers

Benefited from lowerdepreciation charges as someassets were fully depreciated


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Industry Focus


Page 13

DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)BUY (>15% total return over the next 12 months for small caps, >10% for large caps)HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)FULLY VALUED (negative total return i.e. > -10% over the next 12 months)SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)Share price appreciation + dividends

DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson(www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSRGO). For access, please contact your DBSV salesperson.

GENERAL DISCLOSURE/DISCLAIMERThis report is prepared by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers Securities

(Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). This report isintended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any meansor (ii) redistributed without the prior written consent of DBSVR. It is being distributed in the United States by DBSV US, which acceptsresponsibility for its contents. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein shouldcontact DBS Vickers Securities (USA) Inc (DBSVUSA) directly and not its affiliate.

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers toDBSVR, DBSVS, and/or DBSVH) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressedare subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document doesnot have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is forthe information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separateindependent legal or financial advice. DBSVR accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claimsfor loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document.This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-owned subsidiary ofDBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in thesecurities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or employees may have positions in,

and may effect transactions in securit ies mentioned herein and may also perform or seek to perform broking, investment banking and otherbanking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there canbe no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and itmay not contain all material information concerning the company (or companies) referred to in this report.

The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates andassumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates onwhich the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actualresults. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIEDUPON as a representation and/or warranty by DBSVR, DBSVS and/or DBSVH (and/or any persons associated with the aforesaid entities), that:

(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or riskassessments stated therein.

Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to thecommodity referred to in this report.

DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or researchdepartment, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US personswishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussedin this document should contact DBSVUSA exclusively.

ANALYST CERTIFICATIONThe research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companiesand their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensationwas, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 12 Jul 2011, the analyst andhis / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report(interest includes direct or indirect ownership of securities, directorships and trustee positions).


14/14

Industry Focus


Page 14

COMPANY-SPECIFIC / REGULATORY DISCLOSURES1. DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the company mentioned as of

08-Jul-2011

PT. DBS Vickers Securities Indonesia ("DBSVI") has a proprietary position in Indosat, XL Axiata and Telekomunikasi Indonesiarecommended in this report as of 12 July 2011.

2. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of the company mentioned as of11 Jul 2011.

3. Compensation for investment banking services:i. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may have received compensation, within the past 12

months, and within the next 3 months receive or intends to seek compensation for investment banking services from thecompany mentioned.

ii. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investmentbanking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain furtherinformation, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed inthis document should contact DBSVUSA exclusively.

RESTRICTIONS ON DISTRIBUTIONGeneral This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or

located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would becontrary to law or regulation.

Australia This report is being distributed in Australia by DBSVR and DBSVS, which are exempted from the requirement to hold anAustralian financial services licence under the Corporation Act 2001 [CA] in respect of financial services provided to therecipients. DBSVR and DBSVS are regulated by the Monetary Authority of Singapore [MAS] under the laws of Singapore,which differ from Australian laws. Distribution of this report is intended only for wholesale investors within the meaningof the CA.

Hong Kong This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the

Hong Kong Securities and Futures Commission.

Singapore This report is being distributed in Singapore by DBSVR, which holds a Financial Advisers licence and is regulated by the MAS.This report may additionally be distributed in Singapore by DBSVS (Company Regn. No. 198600294G), which is an ExemptFinancial Adviser as defined under the Financial Advisers Act. Any research report produced by a foreign DBS Vickers entity,analyst or affiliate is distributed in Singapore only to Institutional Investors, Expert Investors or Accredited Investors asdefined in the Securities and Futures Act, Chap. 289 of Singapore. Any distribution of research reports published by aforeign-related corporation of DBSVR/DBSVS to Accredited Investors is provided pursuant to the approval by MAS ofresearch distribution arrangements under Paragraph 11 of the First Schedule to the FAA.

UnitedKingdom

This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning ofthe Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK isintended only for institutional clients.

Dubai/

United ArabEmirates

This report is being distributed in Dubai/United Arab Emirates by DBS Bank Ltd, Dubai (PO Box 506538, 3rd

Floor, Building 3,

Gate Precinct, DIFC, Dubai, United Arab Emirates) and is intended only for clients who meet the DFSA regulatory criteria tobe a Professional Client. It should not be relied upon by or distributed to Retail Clients. DBS Bank Ltd, Dubai is regulated bythe Dubai Financial Services Authority.

United States Neither this report nor any copy hereof may be taken or distributed into the United States or to any U.S. person except incompliance with any applicable U.S. laws and regulations.

Otherjurisdictions

In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified,professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Vickers Research (Singapore) Pte Ltd 8 Cross Street, #02-01 PWC Building, Singapore 048424Tel. 65-6533 9688

Company Regn. No. 198600295W

20110711 telecommunications dbsv

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