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SingTel’s investment moats

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The recent announcement of the prospect of a 4th telecommunication player entering the market has caused SingTel, Starhub and M1 shares to fall.  Whilst it is too premature to make a judgement on the impact to the three telecommunication players, SingTel should be the least affected. Most investors are probably unaware of SingTel’s investment moats

Unlike the rest of the existing players, SingTel differentiates itself from the rest of the league by positioning itself as a regional player with more than 610 million in Asia Pacific and Africa. In Singapore, it holds the number 1 market share with 4.1 million mobile customers. Granted that the new entrant will eat into SingTel’s market share in Singapore, it should be noted that the major bulk of SingTel’s earnings are derived from overseas. In addition, SingTel has a very diversified revenue base. Hence, the risk is very much mitigated for this giant.

SingTel

Investments

In its 100% owned Australia unit, Optus, SingTel has the number 2 market share with 9.3 million mobile customers. SingTel also holds the number 1 market share in India, Thailand and Indonesia. Both Optus and Indonesia’s Telkomsel are SingTel’s champion income drivers. For first quarter 2016, Optus’ EBITDA grew 0.7% to A$645 million while Telkomsel’s EBITDA was $325.6 million.

Mobile and broadband service continued to be SingTel’s main revenue driver with Australia, India, Thailand, Singapore and Indonesia markets being the major contributors. In years to come, Indonesia will become one of the biggest income drivers for SingTel. The Group enterprise markets for Singtel include mobile, equipment sales, fixed voice and data, managed services, cloud computing, cyber security, IT and professional consulting. This segment generates EBITDA of $329.5 million for first quarter 2016.

Even though SingTel has formidable investment moats, it does not mean that understanding its business model is straightforward. Due to its aggressive overseas ventures, SingTel has attracted numerous liabilities across the region. This is because the telecommunication sector is tightly controlled by governments all over the world. SingTel’s 100% ownership in Australia’s Optus is an exception. But even so, in the latest financial statement, SingTel highlighted that Optus is in dispute with third parties regarding certain transactions entered into in the ordinary course of business. It is unknown what these disputes entailed.

In India, SingTel’s Bharti Airtel is also subject to tax demands and disputes. SingTel’s share amounted to an eye-popping $688 million. In Thailand, SingTel’s AIS faced a number of demands and claims amounting to more than $590 million (SingTel’s share). In Indonesia, Telkomsel has filed appeals and cross-appeals amounting to approximately IDR 802 billion (Singtel’s share: S$29 million) for various tax claims arising in certain tax assessments.

Although SingTel’s overseas units are challenging these claims, the contingent liabilities nevertheless represent a certain level of risk. In my point of view, the impact of the 4th telco player has been grossly manifested, at least for SingTel. Of more concern for SingTel investors should be the foreign regulatory impacts on SingTel’s overseas investments because these are the main income drivers for the company.

Fundamentally, SingTel has a very complex business structure and it is a company that is not so easy to understand. That is why I am not vested in SingTel’s share until now, even though it has been under my radar for a long time. When investing in stocks, always choose one with the best investment moats. SingTel certainly fits the bill. At current price of $4.00 per share, it is certainly overvalued. I will probably enter at $2.80 level.

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SG Wealth Builder

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Updated: September 15, 2016 — 6:25 am
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