At a time when Starhub and M1 share prices are dropping like flies, Singtel share price is in supreme form. The corrections for Starhub and M1 shares are due to the announcement of the entry of the fourth telco player, TPG Telecom, which made the winning bid of $105 million for the licence in December 2016.
When investing in stocks, always place your bets on the players with the biggest investment moats in the industry. Size matters and you don’t want to catch a falling knife investing in smaller companies which cannot withstand changes in market forces.
Over the past twenty years, the telecommunication industry in Singapore has witnessed an explosive growth in mobile phone penetration rate, growing from 20% to the current 150%. In view of this, the market is already very saturated and the potential for growth is also limited because of Singapore’s small market size. Investors who had placed their faith on domestic players like Starhub and M1 must have reality check as these companies’ growth hinge purely on Singapore market.
Starhub and M1 have amassed huge following among Singaporean investors because of their attractive dividend payouts over the past decade. But experience has taught me that while past performance is relevant, it cannot guarantees future performance. This principle also applies for dividend. Changing market dynamic and competition often impact the smaller players because these factors bite into their market size. Inevitably, companies that lack investment moat will see their profits erode and would be forced to “right-size” their dividend payouts for sustainability purposes.
To put things into perspective, both Starhub and M1 recorded really disappointing financial results for 2016. Starhub’s net profit declined from $372 million in 2015 to $341 million in 2016. M1’s fate was even worse – net profit declined 16.1% year-on-year to $150 million. Given that the fourth telco has not even start operations, perhaps investors of Starhub and M1 should start running for their lives?
On the other hand, Singtel recorded an impressive 3Q performance, with net profit up 4% for the quarter at S$994 million. Pre-tax contributions from regional mobile associates grew 2% to S$660 million. Indeed, being a regional player, Singtel traditionally derived most of its profits for mobile communications from regional associates than the Singapore market. Interestingly, profits from Singapore consumers actually increased 6% in 3Q to $185 million. However, its Australia and regional mobile associates contributed even more to its coffers – $594 million and $660 million respectively.
I have previously written an analysis on Singtel. Readers may check out the report here.
Unlike Starhub and M1, Singtel’s strategy has always being penetrating large markets with significant economic fundamentals (young work force with earning abilities). Thus, Singtel derived the bulk of its revenue from overseas consumers like Australia, India, Indonesia, Philippines and Thailand instead of Singapore.
Typically, Singtel only invest in overseas companies that allow the group to scale and dominate market position. Among the associates, strong performance from Telkomsel powered associates’ pre-tax contributions with pre-tax profits up 31% on the back of robust growth across data and digital businesses. Being a regional player with diversified revenue sources from different segments, Singtel share price has been mighty resilient in the face of current economy headwind.
I continue to like Singtel’s free cash flow for 9MFY17, which increased to $2,291 million, an increase of 12% as compared to last year. The free cash flow has dropped below the $3 billion level mark since last year as a result of investment in the cyber security business, e.g. Trustwave Inc. This is a healthy development because I don’t believe in hoarding cash. In acquiring cyber security businesses, Singtel is building for the future. Return on Equity (ROE) is fairly stable for the past 5 years, hovering at 15 to 16%.
Dividend amount increased from 15.8 cents in 2012 to 17.5 cents per share in 2016. Singtel’s dividend payout ratio is between 60% to 75% of underlying net profit. Since 2006, Singtel has distributed a total of about $2.00 dividend per share. What this means is that if you have bought Singtel shares at $2.50 back in 2006 and religiously hold it until now, you would have collected $2.00 worth of dividend per share. If you factored in the paper gain of $1.50 per share, you would have made a profit of $3.50 per share. Not a bad long-term investment indeed!
The weakest link among Singtel business divisions should be the Group’s Digital Life., which continued to lose money. Q3F17 saw the division losing $22 million and it’s hard to envision these businesses ramping up to global scale. The combined revenue of Amobee, HOOQ and DataSpark also do not contribute meaningfully to the Group’s bottom line and thus pose negligible impact to Singtel share price.
On the other hand, the ICT business offers more promise for Singtel’s long term growth. Against the backdrop of a slowing Singapore economy and more challenging business environment all around, with stable revenue seen in ICT growth offsetting carriage declines. EBITDA declined on higher investments in cybersecurity & intense competition in Australia.
I am not a Singtel customer nor am I vested in Singtel shares. However, as competition heats up with the entry of a fourth player, there is a need for the telcos to step up their game. While I obviously hope for a price war for the data plans, the likely outcome should be an increase in the offering of more innovative products through tie-up with partners among the telcos. The recent tie-up between Microsoft and Singtel is an example. In any case, Singtel, being the largest player would be the least affected.
Windfall from NetLink Divestment
All eyes should be on the potential divestment of NetLink Trust through IPO. Singtel is required by the regulators to reduce its stake in the firm to below 25 percent by 2018. The divestment, if materialized, would provide an estimated $2 billion worth of warchest for Singtel to fund its business expansion program or reduce its debts. The deal would ensure Singtel share sustain its bull run up till 2018.
At current valuation, I consider Singtel share price to be inflated but this company is well-known for being stable and have paid consistent dividends throughout the past decade. I am looking at building an investment portfolio of companies with strong growth prospect and track record of dividends. SingTel seems to fit the bill. I think I will revise my entry price upward to $3.20 for this stock.
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