We expect SingTel to report underlying net profit of S$835m (down 10% y-o-y, up 4% q-o-q) on 10th of February, which could be slightly lower than consensus estimates. In our view, tax savings rather than associate growth would drive the sequential growth. In 2Q09, SingTel paid $33m in tax on dividends from associates but in 3Q09F there are no dividends to be recognized from associates.

Lower sequential contribution from associates. Weaker Indian rupee (down 3% q-o-q) and Indonesian rupiah (down 10% q-o-q) are expected to impact earnings contributions from Bharti and Telkomsel. We do not expect Telkomsel's contribution to recover yet as it benefited from S$22m one-off tax adjustments in 2Q09, which would be absent in 3Q09F.

Higher sequential contribution from Singapore and Australia 3Q09F would benefit from lower iPhone subsidy compared to 2Q09. However, Optus contribution would be impacted by weak Aussie dollar (down 20% q-o-q).

SingTel trading at premium to Bharti is unsustainable. Currently SingTel trades at 13.1x PER and 7.3x EV/EBITDA for FY10 compared to 12.5x PER and 7.0x EV/EBITDA for Bharti with 15% FY09-FY12 earnings CAGR. We believe either Bharti has to rise or SingTel has to decline or both for SingTel to look reasonable vis-à-vis Bharti, which is the only growth driver in SingTel's portfolio. SingTel's dividend yield of 4.5% is not compelling either. Regional telecom sector average under our coverage is 12.1x PER and 4.8x EV/EBITDA, implying SingTel is not cheap on valuation grounds.

We fine-tuned our FY09 and FY10 estimates which are 3% and 6% below consensus estimates respectively. Maintain FULLY VALUED, with revised SOTP-based target price of S$2.52. Key risks are (i) Weak performance of Telkomsel, Warid and Globe as disposable income is impacted in their countries (ii) cut in corporate spending in Singapore where SingTel has majority market share (iii) Exchange rate risks (iv) Potentially higher capex in Australia, implying short-term funding issues (v) lower growth for Bharti, if Rcom continues with aggressive pricing on GSM network.