Underlying net profit up 16% to S$696 million

Group

During the quarter, underlying earnings 2 for the SingTel Group increased by a healthy 16 per cent to S$696 million. This is after adjusting for non-recurring items, such as the divestment of Belgacom.

Net profit after tax declined to S$700 million. In the last corresponding quarter, SingTel had recorded net exceptional gains of S$703 million mainly from the disposal of a 69 per cent stake in SingPost and its Yellow Pages directory assets and businesses.

The Group is aligning its accounting treatment for goodwill to the new financial reporting standard (FRS 103) with effect from this financial year, beginning 1 April 2004. Under this standard, goodwill arising from business combinations as recorded in the balance sheet of the Group is no longer amortised and charged to the income statement. Instead, such goodwill will be tested for impairment annually.

Group revenue increased to S$3.02 billion, a strong 12 per cent rise from the last corresponding quarter (excluding Optus’ C1 Defence contract). Operational EBITDA rose 9.3 per cent to S$1.13 billion, EBITDA increased 7.2 per cent to S$1.51 billion while the EBITDA margin improved further to 37.4 per cent.

The Singapore business generated S$372 million of free cash flow and maintained an EBITDA margin of 51 per cent despite a challenging operating environment. SingTel Optus continued to build on its operational momentum. It expanded its EBITDA margin to 30 per cent and increased net profit to S$184 million.

Following the disposal of the Group’s stake in Belgacom in March this year, the Group no longer equity accounts for Belgacom from 1 April 2004. For the quarter, share of earnings from associates contributed S$296 million, representing an impressive 32 per cent increase from the same quarter last year (excluding Belgacom’s contribution).

Reflecting the importance and success of SingTel’s international investments, the Group’s overseas investments continued to contribute over 70 per cent of proportionate revenue and more than 60 per cent of proportionate EBITDA.

Mr Lee Hsien Yang, SingTel’s President and CEO, said: “The SingTel Group has started the financial year on a very steady footing, delivering yet another strong performance for the quarter. The Singapore business continues to deliver healthy cash flows. In Australia, Optus is maintaining its revenue growth momentum, while improving both its margins and cash flow.

“The Group’s regional associates have also delivered higher profits on the back of strong subscriber growth. The success of our international expansion strategy – which we embarked on in the late 1980s – now puts the Group in an excellent position for further growth.”

SingTel

SingTel’s revenue for the quarter was S$1.00 billion, a decline of 2.7 per cent year-on-year excluding directory advertising revenue. Compared to the preceding quarter, revenue was slightly higher for telecom services (ex-IT & Engineering), confirming early signs of improvement.

Data & Internet revenue, the largest revenue stream, increased 5.8 per cent to S$298 million compared to the same period last year and 6.8 per cent on a sequential quarter basis. Broadband revenues grew 57 per cent to S$70 million as the number of broadband lines increased 40 per cent from a year ago to 268,000. SingTel maintained its leadership with a 60 per cent market share.

Revenue from mobile communications grew 3.1 per cent to S$207 million due mainly to higher ARPU from roaming revenue. SingTel’s postpaid churn rate dropped to 1.4 per cent despite a high 87 per cent mobile penetration in Singapore as of June 2004. The use of SMS and other mobile data services such as *SEND and MMS continued to rise. Mobile data services accounted for 18 per cent of ARPU, up from 16 per cent in the last corresponding quarter.

International telephone revenue fell 16 per cent to S$169 million due to lower inpayment revenue and lower collection rates. The volume of international outgoing minutes (ex-Malaysia) was stable compared to the corresponding quarter last year and the preceding quarter.

For the quarter, revenue from national telephone declined 9.5 per cent from a year ago to S$133 million. This was due to Internet users migrating to broadband as well as a decline in traffic from unusually high levels during the Sars outbreak last year. Revenue was stable compared to the preceding quarter.

Revenue from IT & engineering rose 3.5 per cent from a year ago to S$136 million, driven by improved business conditions in Singapore. For the quarter, about 15 per cent of the NCS group revenue came from outside of Singapore, a result of the company’s regionalisation efforts.

SingTel’s focus on cost management saw a decrease of 3.5 per cent or S$17 million in operating expensesfrom a year ago. Compared to the preceding quarter, there was a 15 per cent decline of S$87 million due mainly to lower traffic expenses, staff costs and cost of sales.

Staff costs fell by 10 per cent due to a lower average headcount, lower employer’s CPF contribution rate as well as a one-off benefit from aligning the accounting treatment for SingTel’s Performance Share Plan to the new financial reporting standard (FRS 102).

This quarter, interest expense declined 10 per cent due mainly to lower bond borrowings following the buyback of S$485 million of SingTel bonds in October 2003. There was a net foreign exchange gain of S$6 million arising from a loan to Optus, net of hedging.

Cash capital expenditure for the quarter was S$85 million, an increase of 24 per cent year on year, but still less than 10 per cent of operating revenue.

SingTel Optus

Optus had a strong start to the 2005 financial year, delivering a solid set of results for the first quarter in terms of revenue, profits and cashflow. It continued to grow more quickly than the market as a whole and to gain market share, with all divisions contributing to the company’s success.

Net profit after tax for the quarter was A$151 million, up 51 per cent compared to the same quarter last year. Operating revenue increased 12 per cent to $1.7 billion, excluding the C1 satellite Defence contract. Operational EBITDA grew 22 per cent to A$506 million, with tight cost control resulting in margins expanding by 2.4 percentage points to 30.4 per cent.

Optus continued to deliver very strong cash flow growth. Free cashflow was A$248 million for the quarter, 34 per cent higher than the same quarter last year. Operating cash grew by 14 per cent to A$435 million and cash capital expenditure was A$187 million. The ratio of cash capital expenditure to operating revenue fell to 11 per cent.

“Optus has had a good start to the financial year, reporting its tenth successive quarter of double-digit revenue growth,” Mr Paul O’Sullivan, incoming Optus Chief Executive said.

“Optus indicated at the start of this year that we expected our growth rate to moderate, as a result of growing penetration in the mobile market; increased price discounting by Telstra in the corporate market; and high market share in the HFC areas. The first quarter results show that, even accounting for these factors, Optus continues to outperform the industry and gain market share,” Mr O’Sullivan said.

“As the Challenger, Optus will continue to compete using product innovation and non-price differentiation as our primary tools to keep growing market share. In specific segments, Optus may choose to compete on price, which may place short term pressure on margins. With the backing of SingTel, its scale and track record, Optus is well placed to withstand these challenges and emerge as a stronger competitor,” Mr O’Sullivan said.

Optus Mobile acquired 168,000 customers during the quarter, posting a 17 per cent year-on-year increase in subscribers, bringing its base to 5.7 million or 35 per cent market share. This growth was achieved despite a mobile penetration of 80 per cent in Australia.

Mobile revenues grew 13 per cent to A$901 million with margins improving to 39 per cent and EBITDA increased 16 per cent to A$348 million. Data revenues reached 15 per cent of ARPU this quarter. Compared to the same quarter last year, postpaid ARPU increased 1.2 per cent assisted by an improved proportion of higher value customer segments while prepaid ARPU increased by 1.9 per cent.

Optus remained focused on providing innovation and value in a competitive market. This was reflected in the popularity of services like Optus Zoo, the mobile information and entertainment portal, with Optus Zoo customers increasing during the quarter to more than 860,000.

For the first quarter, Optus Business and Optus Wholesale saw combined revenue growth of 13 per cent to A$394 million, excluding the C1 satellite Defence contract. Combined margins improved to 27 per cent, driven by EBITDA growth of 29 per cent. Both divisions announced important customer wins and re-contracts including the Commonwealth Bank of Australia, the NSW Department of Education and Training, Cluster 3 (DIMIA), TXU, BAE, Holden, AstraCom, Golden West Networks (GWN) and WIN Television.

Optus Business continued to record gains in the corporate market with a 7.3 per cent increase in voice revenue, data and IP growth of 3.5 per cent and a 42 per cent increase in satellite revenue. Domestic data and IP revenues recorded a solid 6 per cent growth partially offset by continuing price pressures for international data.

Gaining profitable size and scale continues to be a key objective for Optus Business. In May 2004, Optus announced a successful offer for Uecomm, which provides broadband data services to business customers. Uecomm’s success with mid-sized corporates complements Optus’ track record with larger accounts. Its fibre access network will enlarge Optus’ footprint and increase capacity.

Optus has now acquired more than 90 per cent of Uecomm and is proceeding with the compulsory acquisition of the remaining ordinary shares. Optus will consolidate Uecomm’s results starting in the second quarter.

Optus Wholesale revenue grew by 34 per cent to A$128 million compared to the same quarter last year. Voice revenue showed particularly strong growth of 49 per cent, assisted by some one-off low margin domestic transit business.

In the first quarter, Consumer & Multimedia had operating revenue of A$381 million which was up 9.3 per cent. Free cash flow doubled to A$29 million compared to the same quarter last year. The EBITDA margin continued to improve, up four percentage points to 14 per cent.

Broadband was an important growth driver during the quarter. OptusNet Broadband had 183,000 customers at the end of the quarter including 22,000 DSL customers. This is nearly 70 per cent higher than a year ago.

The division added 35,000 broadband customers in the current quarter. This is double the March quarter customer adds and more than three times the December quarter. DSL and dial-up revenue increased by 32 per cent, driven in part by growth in DSL. Off network voice revenue grew by 11 per cent.

Local telephony bundling rates continued to increase with 64 per cent of customers on the Optus HFC network and 43 per cent of customers off the network taking more than one Optus product.

Associated companies

SingTel’s associated companies continued to deliver very strong results this quarter.

The Group’s share of pre-tax earnings from its associates³ rose to S$296 million, accounting for 32 per cent of the Group’s profit before exceptionals and tax. This represented a 32 per cent increase year-on-year, excluding Belgacom, and was due to the strong performance of the regional mobile associates, especially Bharti.

The Group’s share of pre-tax ordinary earnings from its four regional mobile associates 3 increased 31 per cent to S$274 million. This was attributable to very strong subscriber growth. The four companies’ combined mobile subscriber base grew 45 per cent year-on-year to over 45 million.

Contributors to Group earnings included Telkomsel (S$117 million, +4.4 per cent), Advanced Info Service (S$77 million, +23 per cent) and Globe Telecom (S$46 million, +48 per cent), which was based on an equity interest of 40.1 per cent compared to 29.1 per cent a year ago. Bharti contributed S$35 million, a significant improvement on the S$3 million it contributed in the June 2003 quarter.

Including SingTel and Optus, the Group’s regional mobile subscriber base increased by 15 million, or 40 per cent, year-on-year to 52 million as at 30 June 2004. Most of the growth came from Telkomsel and Bharti which together added nearly 9 million customers.

SingTel received S$56 million in cash dividends from AIS, an increase of 38 per cent compared to the same quarter last year due to a higher dividend payout ratio. Globe has a new dividend policy which pays semi-annual dividends in March and September. During the quarter, Telkomsel declared a dividend and SingTel’s share amounted to Rp 667 billion, which the company expects to receive in August and November 2004.

Cash flow and balance sheet

SingTel continues to adopt a very disciplined approach to capital management, with an objective of delivering appropriate returns to all stakeholders. The Group’s free cash flow† decreased 8.6 per cent to S$676 million for the quarter. This was due mainly to changes to the timing of dividend payments from associates as well as the divestment of Belgacom which contributed S$72 million in dividend in the last corresponding quarter.

After lower interest payments, exchange rate movements and S$2.11 billion of proceeds received from the Belgacom IPO, the Group’s net debt was reduced by $2.85 billion during the quarter to S$4.26 billion. As a result, net debt gearing was reduced to 17.4 per cent.

Net debt was 0.7 times of EBITDA and the EBITDA interest cover was 14.5 times. These ratios are comfortably within the leverage commitments made by SingTel to its bond investors.

The Group’s strong financial performance gives it significant financial flexibility. SingTel announced during the quarter a record payout of S$4.1 billion to shareholders via a S$3.0 billion capital reduction and a S$1.1 billion final gross dividend for financial year 2004. Shareholders have approved the proposals at the recent Annual General Meeting.

Outlook

There have been no significant changes to the guidance issued earlier with the results for the financial year ended 31 March 2004. The Group will next update its guidance outlook when it announces its half year results.

Please refer to the Group’s Management Discussion and Analysis document for a full commentary on the Group’s results for the quarter.

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1 Includes IDA compensation and share of results from associates
2 Underlying net profit is defined as net profit before goodwill, exceptionals, Belgacom’s net contribution and the exchange difference on loan to Optus (net of hedging)
3 AIS, Bharti, Globe and Telkomsel
† Operating cash less cash capex