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Investing in SingTel

Bullionstar

Bullionstar

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Nowadays, I am extremely fed up with M1 network services. No matter where I go, the 3G network coverage is terribly poor for my mobile phone. As a result, sometimes I could not receive messages from my loved ones and friends.

I suspect the drop in the network quality may be because I cancelled M1 4G subscription recently – previously it was offered to me free-of-charge when I renewed my subscription plan but M1 stated that it would charge me $10 extra from January 2015 onward. If not for the fact that I have to pay hefty penalty for cancelling my subscription plan contract, I would have terminated my line long ago.

From the consumer’s point of view, if I am not satisfied with a company’s services or products, I would not invest in their shares. For a knowledge-driven economy, internet data access is critical in Singapore and if M1 is unable to provide reasonable network service level, it don’t deserve any investment merits. Notwithstanding the dividend track records, if M1 is unable to retain customers, its economic moat will only erode over the long run.

SingTelThe saturated Singapore market and the fierce competition among the three telecommunication companies (SingTel, M1 and Starhub) reinforce the importance of economic moats in this sector. In terms of scale and market share, SingTel is considered the leader because it used to be a wholly government-owned carrier before it became a listed company. Having the scale, in terms of subscribers and network infrastructure, allows SingTel to lower its overhead costs per customer. For example, the more the subscribers on its network, the lower the marketing costs and interconnection fees.

Of interest to note is that the government restricts the number of players in the telecom services to three, and thus this allows the three telecommunication companies to enjoy efficient scale and earn good returns. This makes perfect sense as Singapore’s market is so small and as this industry requires huge capital requirements, having too many players would only reduce sustainable cost advantages for the players.

As a result, the three telecom service providers enjoy substantial government’s backing. Singapore’s sovereign wealth fund, Temasek Holdings is the largest shareholder of SingTel, with shares of 51%. Temasek Holdings also has significant deemed interest (indirect shareholdings) in M1 and Starhub.

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From an investor’s standpoint, I prefer SingTel because it has major regional presence in India’s Airtel and Australia’s Optus. Its Q2 financial report stated that the group’s share of pre-tax earnings from the regional mobile associates grew 26% to $629 million. The free cash flow generated for the half-year is $1.9 billion, riding on stronger operating cash flows from Singapore and Australia, as well as dividends from its associates.

I am also intrigued by SingTel’s aggressive foray into the digital marketing business. The Digital Life segment of SingTel is acquiring online businesses such as Amobee, Adconian and Kontera to add scale and capabilities. Amobee has won several top advertising industry awards and Dash, SingTel’s mobile money service has won the Gold Award in the Best Consumer Product Category at the 2014 Singapore infocomm Technology Federation Awards. For sure, I believe investments in the digital arena will definitely reap huge rewards and create new revenue streams for SingTel moving forward.

Not vested in this counter but definitely tracking this stock for future investments.

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