Singapore Telecommunications Limited, better known as Singtel, is Singapore’s largest telecommunications company. Singtel not only has business operations in Singapore but also in Australia through its fully owned subsidiary, Optus, which is the second largest telco in Australia as well as in India through its subsidiary, Bharti Airtel, which is the third largest carrier in India. Let’s take a look if it’s a good time to buy Singtel now, seeing that 5G is coming into Singapore next year.
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As per mentioned, Singtel is Singapore’s largest telco company along side its 3 other main competitors, Starhub, M1 and TPG. In total, there are 11 telcos in Singapore. This means that the industry is highly competitive as the pie isn’t getting bigger yet there are more players coming in for a slice. When an industry gets overcrowded, it’ll result in lower profit margins as companies are actively fighting for market share. This can be worrying for investors when deciding to invest in companies in high competitive industries.
As mentioned above, Singtel has a few subsidiaries under its wing and I’ll be sharing a brief overview on some of them.
Optus is Australia’s second largest telco, serving over 9 million customers each day. The company started its operations in 1992 and officially became a wholly-owned subsidiary of Singtel on 30th August 2001.
NCS Pte Ltd
NCS Pte Ltd is a leading regional ICT solutions provider with 18 offices across 10 countries in the Asia Pacific and Middle East. NCS helps its customers gain a competitive edge through its extensive range of services, including consulting, development and integration, managed services, and technology solutions.
Having established itself as a choice IT services provider in the region’s public sector, NCS has since successfully extended its presence into the defence and homeland security, education, transportation and logistics, airport and aviation, healthcare and life sciences, financial services, manufacturing, telecommunications and utilities sectors.
Amobee is a global marketing technology company serving the world’s leading brands and agencies. Amobee’s patented Brand Intelligence technology measures digital engagement to provide a deeper understanding of audiences, their mindset and interests. Amobee’s unified platform enables marketers to seamlessly plan and activate cross channel, programmatic media campaigns using Brand Intelligence, and includes ads API integrations with Facebook, Twitter, Instagram, Pinterest and Snapchat.
Trustwave is a leading cybersecurity and managed security services provider that helps businesses fight cybercrime, protect data and reduce security risk. Offering a comprehensive portfolio of managed security services, security testing, consulting, technology solutions and cybersecurity education, Trustwave helps businesses embrace digital transformation securely. Trustwave is a Singtel company and the global security arm of Singtel, Optus and NCS, with customers in 96 countries.
DataSpark Pte Ltd
DataSpark Pte Ltd specializes in developing and commercializing telco-enabled analytics product & services across Asia, Australia and Africa. To date, DataSpark has filed for 15 patents and is recognized by the global research technical and business community as one of the leading innovators of Geo-spatial analytics.
5-Year Performance (Group)
Note : Chart figures are in millions
Based on their 5 year performance, we can see that Singtel has been pretty stagnant for the past 5 years. Their operating revenue and EBITDA did not change much across the 5 years but their net profit has been quite the roller coaster. The net profit was increasing slowly from FY2016 to FY2018 but soon saw a deep dive towards FY2019 and FY2020.
Just to note some of the key events that influenced the results over the past 5 years, FY2018 included the gain on disposal of economic interest in NetLink Trust of S$2.03 billion. FY2020 included the Group’s share of Airtel’s net exceptional loss of S$1.80 billion mainly for regulatory costs.
If we took into account the one off items in FY2018 and FY2020, we can see that Singtel has a rather consistent net profit of around 3bln across the past 5 years.
Note : Chart figures are in millions
Looking at their cash flow for the past 5 years, we can see that the free cash flow has been consistently increasing at a much faster rate than the capital expenditure. We can also see the difference between the free cash flow and the capital expenditure is increasing across the past 5 years which is great.
Earnings and Dividends Per Share
Note : Per share data is in S$ cents
Taking a look at the earnings per share, we can see that it has been on a rather consistent downward trend since FY2016. While the earnings per share has been decreasing, the dividends stayed rather consistent which was worrying because in FY2019, they actually had a payout ratio above 100%. This meant that for every dollar of profit they made, they paid out more than a dollar of dividends. In 2018, Singtel even gave out a special dividends of 3 cents due net gains from the disposal of economic interest in NetLink Trust.
This is why, when Singtel announced a dividend cut, I was not surprised because the dividends was unsustainable and the dividend cut was inevitable. This actually reminded me of what happened to Starhub in FY2017 and FY2018, whereby they burnt themselves out just to pay out insane dividends to shareholders. Starhub had a payout ratio of ~118% in FY2017 and a payout ratio of ~138% in FY2018. As anticipated, a dividend cut soon came which led a huge dive in its share price.
The saving grace for Singtel is that they only assured shareholders a maintained dividends of 17.5cents until FY2019. Moving forward, they will most probably revise the dividend policy and maintain an acceptable payout ratio such as 90%. Singtel’s dividend cut indicates that the management is putting the company’s interests first, ensuring that the company isn’t burning all its cash flow.
Near Term Pains, Long Term Gains
At the current px now, I feel that there is still some downside that investors have failed to price in. For those who currently hold Singtel, please don’t panic sell now because I sincerely believe that in the next 5-10 years down, Singtel can go back up to $4. Just hold on tight and collect dividends. For those who don’t have, I’d suggest stay away until there is some stability and limited downside.
Bharti Airtel is a very well known subsidiary of Singtel but for all the wrong reasons. In 2020 alone, Bharti Airtel booked in a net exceptional loss of S$1.80 billion mainly for regulatory costs.
For the 1st quarter ended 30th June 2020, Singtel took a net exceptional charge of S$364 million. This mainly comprised of Singtel’s share of Airtel’s additional provisions for the adjusted gross revenue matter following the Supreme Court of India’s decision in July and exceptional tax charges, partly offset by a dilution gain of S$550 million on Singtel’s reduced equity interest in Airtel following a successful share placement with institutional investors by Bharti Telecom.
My take on Bharti Airtel is that I fear it will continue to be a weak link to Singtel and continue to pull down on Singtel’s performance. Hopefully things will start to pick up and it can start contributing meaningfully to Singtel.
Digital Bank License
Singtel and Grab announced a joint bid for a digital full bank licence in Singapore whereby Grab will own 60% stake in the consortium entity while Singtel will hold the remaining 40% stake.
The joint venture will also be an issue moving forward because there are quite a few uncertainties that are not yet clarified. Firstly, we don’t know how much upfront cost there will be for setting up the digital bank and how much capital expenditure it will need.
Don’t get me wrong, yes, it is a good thing that they are trying to expand their business operations as well as build another stream of income but, they are trying to do too many things at the same time and no one knows if they will able to handle all of their on going projects.
On top of the digital banking license, Singtel is due to launch its 5G services in January 2021 and is set to roll out coverage for at least half of Singapore by the end of 2022 and establish full coverage by the end of 2025.
Not to mention the huge capital expenditure that will be incurred by Singtel when setting up the 5G infrastructure and to maintain the service.
When we invest, I always emphasize that we should always buy companies at a reasonable valuation. It’s important to buy the company at a cheap or fair valuation as that allows you to buy with a huge margin of safety.
|PE Ratio||PB Ratio||Annualized Dividend Yield|
Note: The table takes into account a few assumptions such as the numbers used for Singtel is based on their FY2020 AR and the numbers used for Starhub is based on their 1H2020 results
As we can see, Singtel is pretty overvalued right now if you look at their PE ratio of 35x as compared to Starhub’s 14x. Not to mention, this PE ratio is based on FY2020’s earnings. With the current situation, Singtel might see a 10-20% cut in earnings, resulting in a much higher PE ratio if the price doesn’t change. The yield is most probably not sustainable and we might see another cut if the earnings deteriorate too much.
My take is that the next 12-24 months will be pretty tough for Singtel because they will need to juggle the setting up of 5G services amidst the COVID-19 pandemic whilst working on the digital bank with Grab assuming they get the license. There is a huge question mark on the total expenses that will be incurred throughout both projects so investors do need to be prepared for any huge expenses that will be incurred.
All in all, I foresee that Singtel’s 5G segment will only start to be profitable 12 months into service and it’ll take 24 months in total for them to break even, adding in the initial capital expenditure.
For investors who already own a stake in Singtel, I’d say you should just hold on and close your eyes for 2 years. Don’t look at the ups and downs of the market and just stay calm because Singtel’s overall business has not changed that much over the years. Once the 5G segment becomes profitable, Singtel might start to see an overall increase in their year over year operating revenue as well as their EBITDA.
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