IT SEEMS that Singapore Telecommunications has at last captured its Virgin, after forking out A$30 million (S$37 million) for the 74.15 per cent of Virgin Mobile Australia that it did not already own. The price looks pretty cheap, considering that the first time SingTel tried to bed Virgin back in 2000, it came with a hefty price tag of US$500 million.

Accompanied by much hoopla, fanfare and hunks in G-strings, a determinedly 'we can be fun too' SingTel launched its US$1 billion 50:50 joint venture Virgin Mobile (Asia) with Richard Branson's Virgin group. The idea then was that the Virgin group, seen as associated with all things fun, would attract droves of Singaporeans to subscribe to its mobile phone packages. Mr Branson's much-lauded marketing genius might also rub off on the staid giant SingTel. The flamboyant businessman was credited with selling all manner of consumer goods from airline seats, and cola, to cinema tickets, music and even mortgages.

After the mobile service was rolled out in Singapore in late 2001, it lasted barely nine months before the joint venture was called off, with SingTel taking a one-time hit of $45 million. A weak market and the recession were blamed. Blaming the recession was convenient. Market players in Singapore had from the start been sceptical whether the joint venture could work. They felt that, although Virgin's brand name was not unfamiliar in the local market, it just did not have the resonance it did in the West. Discerning customers did not respond to the marketing of Virgin Mobile (Asia) as a premium product and the most expensive mobile phone service.

Lessons were perhaps learnt from the flop of Virgin Mobile (Asia) - because when the similarly named Virgin Mobile Australia (VMA) made its debut Down Under, it was as a low-price, no-frills service aimed at the young and price-conscious. Even then, VMA has not exactly been a resounding success in the five years since its launch. VMA was started in 2000 as a 50:50 joint venture between SingTel's Optus and the Virgin group. Although it has amassed more than 500,000 customers, this figure accounts for less than 3 per cent of the Australian mobile subscriber base. Virgin's customers are mainly young people and other price-conscious people.

The Virgin group increased its shareholding to 74.15 per cent in 2002, and a reported A$200 million has been invested in the business. For Optus to be able now to buy the 74.15 per cent stake for only A$30 million nevertheless seems cheap, though VMA is not expected to make a significant contribution to revenues or profits.

According to Tuesday's statement from Optus, in addition to getting 100 per cent ownership, Virgin Enterprises Ltd has granted Optus a 15-year licence for continued use of the Virgin Mobile brand in Australia.

Market players here are again less than enthusiastic about SingTel's latest move with Virgin, though since only tens of millions of dollars are involved, they seem more charitable with their comments this time round. Though some will say the Virgin brand is over-rated, with its young adherents actually seeking value for money rather than the somewhat off-putting vision of Richard Branson in the buff - although, to be fair, it has been some time since Mr Branson has strutted his stuff as part of his publicity-seeking shock tactics.

Cheap could be VMA's middle name. According to Melissa Favero, Optus's general manager, corporate affairs: 'Full ownership enables Optus much more flexibility to bring scale and capabilities to the company. VMA also gives Optus another avenue to service the value-conscious and youth market segments within Australia.' How the Virgin brand will help Optus gain market share and hopefully profits remains to be seen.

As of now, Optus has eliminated one competitor from the fiercely competitive Australian mobile market by its Virgin acquisition, reducing it to four players. Perhaps Virgin can help Optus recover from being the last Australian telco to introduce the margin slicer, price-cap plans.

Optus, which makes up the bulk of the SingTel group revenues, has seen its growth slowing. This caused SingTel last year to issue its first profit warning in 12 years, saying it might not meet its double-digit growth target for 2005-6. The value of the acquisition could be that with Virgin firmly in tow, so no longer a distraction, Optus and parent SingTel can concentrate on other things. And one of these other things is said to be a bid of A$1 billion-plus for the Australian business of Telecom New Zealand.

SingTel acquires 74% of Virgin Mobile Australia for A$30m : Maintain Buy, S$2.80

Optus announced that they had bought the remainder of the 74% of Virgin Mobile Australia (VMA) that they did not already own for A$30m, thereby effectively owning 100% of the entity. Virgin Enterprises Limited also granted Optus the right to use the Virgin Mobile brand in Australia for 15 more years, which also include other telecommunication products. The A$30m cash consideration also includes the buyout of an existing A$3.1m debt owed by VMA to Virgin. As of end FY05, VMA had net assets of A$8.8m, while revenue stood at A$189m and EBITDA was A$1.3m. VMA offers both prepaid and postpaid cellular services in Australia, utilizing Optus' network, with a subscriber base of over 500k.

We see this as a slight positive for SingTel, even as VMA's FY04 revenue equates to just 5% of Optus Mobile’s FY05 revenue and incremental EBITDA is not significant. VMA is widely expected to turn a profit in FY05, after being loss making since its inception. The A$30m price tag equates to a per subscriber acquisition cost of A$60. Compared to Optus' acquisition cost of A$133 in 3Q05, this may seem relatively cheap, but keep in mind that these subscribers are of lower value compared to Optus' current subscriber base.

SingTel Optus will be keeping the Virgin Mobile brand, as there is some value associated with the VMA name. VMA mostly operates as a no frills carrier that is focused on the prepaid market. The upside of this acquisition is the strength of the VMA brand name within the lower revenue generating Australian youth market. This will enable Optus to compete with Vodafone and Hutchison in this segment without diluting its current subscriber base, which is focused on the corporate and higher-end consumer market segments. We maintain our Buy recommendation on SingTel, with an unchanged 1-year target price of S$2.80.

SingTel sells 5% stake in SingPost : Maintain Buy

SingTel announced this morning that it has sold 95m of its shareholding in SingPost for a consideration of S$105.2m. This placement was transacted at a price of S$1.12, and translates into a realized gain of approximately S$89.4m (Book Value: S$15.8) for SingTel. This sale pares SingTel's shareholdings in SingPost down to 25.9% from 35.9%, which is in line with its strategy of divesting non-core assets to focus on its core business. Although SingTel is committed to reducing its stake in SingPost, there is a six-month lock-up period on the remaining shares.

While the one time gain of S$90m is just 2.5% of expected FY06 net income, what is more important is SingTel's increasingly strong cash position, and underleveraged balance sheet. This further reaffirms that a higher payout ratio than the policy of 50% is a high possibility, and we estimate capital returns to shareholders to fall in the range of around S$2.5-3bn for FY06. We currently have a Buy recommendation on SingTel with a target price of S$2.80.

Telkomsel, Indonesia's biggest mobile operator by market share, has forecast capex of US$1.2 billion in 2006, the report said, citing Chief Executive Kiskenda Suriahardja, who was in Singapore for SingTel's regional mobile investor day Monday. The Indonesian mobile company had a capex budget of US$800 million-US$850 million for 2005. In September, Kiskenda said, the company will expand its network coverage to all counties in Bail and Java, in a move to lock in subscribers before new competitors launch their services.

Malaysia's Maxis Communications Bhd. (5051.KU), which owns 51% of PT Natrindo Telepon Selular, and Hong Kong-listed Hutchison Telecommunications International Ltd. (2332.HK), which has 60% of PT Cyber Access Communications, are expected to begin operating in Indonesia in 2006.

The report, published Tuesday, said Telkomsel aims to have over 15,000 mobile base stations in two years, compared with the current 9,000. Telkomsel expects third-generation, or 3G, service spectrum rules in Indonesia to be announced in January 2006, the report said. The mobile associate expects the Indonesian government to hold a 3G spectrum auction, but didn't say when.

About 22% of Indonesia's 220 million people have cell phones, among the lowest penetration rates in Asia.

PT Telekomunikasi Indonesia (TLKM.JK), or Telkom, holds a 65% share in Telkomsel.

SingTel, which is 61.8% owned by Singapore's state-owned investment company Temasek Holdings Pte Ltd., has spent S$20 billion over the past few years to bolster its regional presence. It also has mobile associates in Bangladesh, India, the Philippines and Thailand.

"Overall, the (investor) day gave us confidence that SingTel's key mobile associates will continue to be the mainstay of its earnings growth," Merrill Lynch said. It added that SingTel's associates are starting to generate more cash, which likely means dividend payments to the group "will rise faster than earnings, as all the associates indicated that excess cash will increasingly be returned to shareholders."

The report forecasts that by fiscal year 2008, SingTel's associates will account for S$2.1 billion, or 45%, of the group's pretax profit, up from 31% in fiscal 2005.

• Underlying profit in line with consensus and our expectations. 2Q06 net profit grew 6% yoy to S$809m. Excluding a S$52.9m exchange gain relating to a loan to Optus and a S$1.3m gain from the dilution of an associate stake, underlying net profit grew 3% to S$755m. Further excluding a S$30m tax benefit from an inter-company loan, underlying profit would have declined marginally. The decline came about as operational EBITDA in Singapore and Australia shrank from intense competition while net contributions from regional associates were flat. Overseas operations contributed 74% and 67% of revenue and EBITDA respectively.
  
  
• Single-digit growth for FY06. Management has guided for higher revenue but lower operational EBITDA yoy for its Singapore and Australian operations for FY06. Pretax contributions from regional mobile associates should continue to grow at double digits. In Singapore, FY06 operating revenue is expected to be flat yoy. But due to higher lower-margin IT business, overall operational EBITDA is expected to decline by mid-single digits. Optus’s revenue growth should moderate but should exceed overall market growth. EBITDA margins will decline, albeit still above 28%. As a result, operational EBITDA and operating cash are expected to be lower than in FY05. Free cash flow is expected to be less than A$1bn, down from A$1.2bn in FY05.
  
  
• Maintain forecasts and Neutral rating. We have fine-tuned our sum-of-the-parts target price to S$2.57 from S$2.66 as the market value of its listed associates has declined. This target implies a prospective P/E of 12-13x. There are no catalysts given the tough key markets of Australia and Singapore. Fears of a share overhang from a potential sale by key shareholder, Temasek (62.7% holding) remain. However, we believe the share price can be supported by expectations of higher dividend payouts (currently 40-50%) from still-strong cash flows.

BT,  Published November 11, 2005
Optus faces maturing pains

IT LOOKED like a good idea at the time, and might still prove to be so. More than four years ago, Singapore Telecom put a A$13 billion (S$16 billion) bet on Cable & Wireless Optus. Equipped with deep pockets, SingTel trawled the region in search of new growth avenues outside of Singapore where the government has fully liberated the telecom market two years earlier.

The combination of diverse revenue streams and a strong presence in the two developed markets in which the two telcos operate is expected to help SingTel 'maintain greater stability in earnings and cash flow.' And indeed it has. Optus today accounts for 41 per cent of SingTel's earnings before interest, tax, depreciation and amortisation (Ebitda).

But competition is heating up as evident in the recent results. Optus's net profit for the second quarter 2006 fell 8 per cent to A$150 million. Revenue growth was flat, at A$1.76 billion while operational Ebitda fell 7.3 per cent to A$504 million.

Down Under, the telco is facing the impact of fierce rivalry and price pressures, particularly in the core mobile segment where capped plans continue to dilute overall sales performance. Operational Ebitda by its mobile division slipped 4.2 per cent to A$359 million. Its business and wholesale segment was also under pressure, with operational Ebitda falling 17 per cent to A$98 million. Similarly, operational Ebitda by its consumer and multimedia segment fell 6.5 per cent to A$47 million. All segments also recorded lower operational Ebitda margins compared to a year ago.

In contrast to recent years when Australia had few major regulatory risks, the sector now faces one of its most defining periods since initial industry liberalisation. Credit agency Fitch Ratings noted that this is due to proposed regulatory changes that coincide with rival Telstra's full privatisation. Regulatory matters that are being considered include the progressive lowering of mobile termination rates, and revising the price caps regime, as well as operational separation.

Fitch expects business risk to rise due to intensifying competition and technological innovation. Both factors could further fragment the industry, thus constrain the ability of operators to grow revenue and to maintain margins. It is projecting a period of more modest growth. After an estimated revenue growth of 5.5 per cent in the year to June 2005, Fitch expects the Australian telecom industry growth to fall to about 2 per cent.

But it may be premature to shrug off Optus because of a slowdown. SingTel's CEO Lee Hsien Yang himself stressed that Optus's performance was partly affected by the telco's investment for future growth. Optus's own CEO, Paul O'Sullivan, has already embarked on a three-pronged strategy to drive growth - to build market share in the business mobile segment, stimulating data revenues and leveraging traditional strengths in the consumer space.

So far, the first two initiatives are said to have seen positive results. Optus's business mobile has increased its market share, with revenue up 7.2 per cent and data revenue now representing 18 per cent of average revenue per user. During the quarter, it added 59,000 new mobile users, boosting its base to 6.09 million. In broadband, Optus added 52,000 users, bringing its broadband customer base to 458,000.

But at the end of the day, a slowdown in a large market like Australia should not be a cause for panic - a one per cent growth there is more significant than one per cent growth in the Singapore market.

CNA, 31 October 2005 1901 hrs

SingTel still interested in Pakistan Telecom after bid winner fails to pay up

SINGAPORE : SingTel has said it remains interested in investing in the Pakistan telecoms market. The telco was responding to questions by Channel NewsAsia after Pakistan's largest telecom privatisation failed at the weekend.

Emirates Telecommunication or Etisalat had offered to buy a 26 percent stake in Pakistan Telecom but failed to pay up within the stipulated time.

SingTel spokesman Peter Heng says the company takes a disciplined approach with its investments and that there must be a strategic fit and the price must be right. SingTel was the third highest bidder for Pakistan Telecom in the tender which closed in June.

Etisalat had offered nearly US$2.6 billion for the 26 percent stake in Pakistan Telecom, more than double SingTel's offer. Despite an extension of the deadline, it has failed to pay the outstanding amount.

Tuesday October 25, 8:21 AM

SINGAPORE PRESS:Regulator To Publish SingTel Prices

SINGAPORE (Dow Jones)--Singapore's telecommunication regulator, the Infocomm Development Authority, will publish the prices of Singapore Telecommunication Co.'s (T48.SG) interconnection services, a move that will change the competitive landscape of the sector, the Business Times reports.

The regulator said it has approved changes to SingTel's reference interconnection offer, which sets out prices, terms and conditions for rival telecom companies seeking interconnection and access to SingTel's network.

"These revisions to the RIO will lead to a reduction in various costs for telecoms players and help them expedite market entry,' IDA said, according to the report.

The paper quotes IDA's deputy chief executive and director-general for telecoms, Leong Keng Thai, as saying the revised RIO, expected to take effect on Nov. 8, aims to expedite the conclusion of interconnection agreements between SingTel and other operators.