SingTel held its annual investor day yesterday and came away with the impression that Optus may be breaking through on broadband in Australia. The other key takeaways are:

Australia
Fixed line competition favoured? The advocacy of a fair fibre-to-the-node (FTTN) competition scored a major boost when the regulator announced that an expert will decide which party will build the network. The Optus/G9 consortium has prepared a rival FTTN proposal which would offer consumers a more attractive value proposition. We understand Optus could offer A$25-A$35 per line compared to the estimated A$55-A$65 that Telstra needs in protecting its margins.We gather that the Australian government is favouring more openness and competition in the fixed line industry, especially in the run up to the election this year. Optus and its joint venture partner Elders has secured a A$958m funding from the Australian government to further extend high-speed broadband services to rural Australia by Jun 09. The network, covering 638,000 sq km, will deploy 1361 broadband wireless sites and install ADSL2+ in 312 exchanges. Optus is optimistic that this could be a turning point for the Optus-led G9 consortium looking to roll out a fibre-to-the-node (FTTN) in urban areas which will open up the urban broadband industry to competition. This proposal competes with incumbent Telstra's FTTN ambition.

Two-pronged strategy.
Optus' current strategy is two fold: 1) build scale on its mobile business. This will enable Optus to compete should the industry consolidate. Optus believes that the Australian mobile industry is likely to consolidate into a three-player market from four currently. While it won't be a major driver of consolidation, it will pursue opportunity if a clear one does emerge as its past experience have demonstrated, (e.g. AlphaWest, UECom, Virgin Mobile). 2) garner more fixed line revenue, which is discussed above.

Singapore
Prepaid strategy paying off. SingTel is still concentrating on the prepaid segment which it sees is a growth area. It believes that it can greater traction within this segment as it relied too heavily on its pricing proposition in the past to which its competitors responded to.Going forward, it will differentiate themselves in the distribution channels and on-the-ground activities such as targeting foreign workers to establish themselves here. In fact, if the month of April is anything to go by, then signs are encouraging as it took 62% of the net adds. It also noted that 60% of its gross adds are foreign workers which have higher ARPUs.

Ready to launch IPTV. We sense that SingTel may launch its IPTV offering in the next two months given that it has started to run teaser ads. It plans to offer: 1) true video on demand;2) content: high definition, Mandarin and dialects, infotainment and documentaries; 3) unbundled packages where subscribers are not required to sign up for basic programming. SingTel cautioned that by itself, IPTV is not an attractive financial investment but to: 1) offer IPTV as part of a bundle; 2) increase its value-add instead of a pure carrier business model; and 3) to increase customer stickiness. We think SingTel's IPTV will be a niche offering, and unlikely to be a significant contributor to its Singapore operations.

Associates & investment strategy
Telkomsel to continue aggressive rollout. A lot of time was devoted to answer questions regarding Telkomsel's rising cost pressures, which were due to: 1) higher labour costs to retain key personnel due to the entry of more players in the market; and 2) its aggressive network rollout to the outlying areas where gensets are required. SingTel said it Telkomsel must continue to roll out aggressively to preserve its market share and stay ahead of competition. It has learned is lesson in the Philippines where Globe Telecom lost market share as a result of not expanding to the rural areas.

To lower capex, Telkomsel plans to: 1) redeploy older equipment in the urban areas to the rural areas. It believes it can swap 30% of the equipment. 2) specify for gensets to be included in the supply tender, which should lower the cost of gensets. 3) It is also trying to consolidate the procurement of gensets for Telkomsel, India and Philippines, which are also facing the issue of the lack of power supply in rural areas, to obtain greater discounts.

In conclusion, we gather that Telkomsel will continue to roll out aggressively to the rural areas to stay ahead of the pack, at the expense of margins in the medium term. Lastly, SingTel welcomes the idea of listing Telkomsel because: 1) it raises transparency; and 2) instils greater financial discipline on the cellco. We also view any potential listing of Telkomsel positively as it would unlock values for SingTel and Telkom Indonesia (Rp9750, TLKM IJ, Underperform) but we think the final decision lies with Telkom which is the major shareholder. We rate the probability of listing Telkomsel as being very low as it would affectthe valuation of Telkom given that the former is the key earnings driver for the group.

WiMAX features in SingTel's strategy. SingTel is developing a centralised strategy to bedeployed across all its associates, and at a later stage possibly extending it to the Bridge Mobile Alliance members. One of this initiative involves deploying WiMAX across the group.It is currently conducting field trials in India and Philippines where there opportunities for wireless broadband. Optus will also deploy WiMAX in addition to ADSL 2+ in its ruralbroadband rollout. WiMAX is preferred over HSDPA in the long term given its superior spectrum efficiency.

Acquisition strategy. While the region remains SingTel's focus market, it is now looking further to Central Asia and the Middle East. We do not think SingTel may up is stake in Bharti Airtel for now as it feels that current valuations are excessive. We suspect SingTel may eye WiMAX operators in countries where it does not have a large presence, such as Taiwan. In Vietnam, SingTel feels that the government is not ready yet to privatise the state-owned telcos, and the timeline for foreign telcos to enter the market is still unclear.

Based on the above, it does not appear that a large acquisition is likely in the foreseeable future.

Valuation and recommendation
Maintain Neutral on SingTel with an unchanged SOP-based target price of S$3.75. We think SingTel lacks immediate price catalysts.

Labels: Neutral, Singtel

Funding obtained for rural and regional broadband network.
Singapore Telecom (SingTel) announced yesterday that OPEL Networks Pty
Limited (OPEL), a joint venture of Optus and Elders Telecommunications
Infrastructure (Elders), has secured in-principle approval of A$958m in
funding from Australia?s government to build the OPEL network, a rural and
regional wholesale broadband network. Australia?s government requires the
network to be built by 30 June 2009. This project should not be confused with
Optus?s expansion of its 3G mobile network which was announced on 30 Jan
2007.

Details on OPEL
Being a joint venture between Optus and Elders, OPEL is able to leverage on
the strengths of both companies. For instance, Optus?s existing transmission
infrastructure and Elders?s 280 retail stores in rural areas. On top of the
A$958m funding from Australia?s government, Optus and Elders will jointly
contribute A$917m to the project in the form of upgraded infrastructure, cash
financing of A$200m and in-kind contributions. Under this project, OPEL will
wholesale backhaul capacity to Optus, Elders and other local internet service
providers at more competitive rates than the incumbent Telstra, thus breaking
its current monopoly.

Growth to come from associates
We feel that with this network, Optus?s competitive position in the broadband
business is improved vis?a-vis the incumbent. At this juncture, however, we
do not expect a significant impact on SingTel?s earnings arising directly or
indirectly from the OPEL network. Looking ahead, we expect competition to
remain intense in both Australia and Singapore. In our opinion, SingTel?s
growth will continue to come from its associates. As seen from its FY07
results, growth in underlying net profits of S$261m from FY06 was
underpinned by the increase in after-taxed associate profits of S$331m.

Maintain DCF target price of $4.08.
We maintain our DCF target price of S$4.08. Key industry events this year
and next year will be the awarding of the tender for the Next Generation
Broadband Network and the implementation of true mobile number
portability. Maintain BUY.

Labels: Buy, Singtel