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SingTel at a cross-road

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The gloves are off as SingTel engages in a battle with Australian rival, TPG Telecom. In late last year, TPG Telecom won the rights to become Singapore’s fourth telco operator. In early April this year, TPG shocked the market by winning the rights to become Australia fourth mobile operator in Australia.

It is still early days to assess the impact of the heightened competition from TPG but SingTel is at a cross-road as it has to compete with TPG in both the Singapore and Australia market. While the impact of a fourth telco in Singapore would have minimal impact on SingTel, the same cannot be said for the entry of a new competitor in Australia. This is because the Australia market is very important to SingTel, which traditionally derived the bulk of its earnings from the regional businesses.

In the fourth quarter ending 31 March 2017, EBITDA from Optus, SingTel’s subsidiary in Australia, was A$741 million, more than half of the Group’s EBITDA of S$1.31 billion. This is not surprising given that the Australia market is so much bigger than Singapore. Net profit was up 1% to A$250 million while operating revenue rose 1.6% to A$2.11 billion.


Against the backdrop of increased competition, Optus continued to enhance the competitiveness of its network – with A$1.5 billion in capital expenditure. At the end of March 2017, Optus’ 4G network reached 96.1% of Australians. Through the deployment of significant spectrum holdings and innovative technologies such as 4.5G and native Voice over WiFi, Optus is improving network coverage and download speeds for customers.

Despite the challenging outlook, SingTel reported strong core revenue and earnings. Year-on-year for 4QFY17, operating revenue grew 5% to $4.3 billion and EBITDA increased 4% to $1.31 billion. Among its overseas joint ventures,  Telkomsel’s pre-tax profit contribution rose 17% as it continued to deliver robust growth across voice, data and digital services. Profit before tax from Telkomsel in the quarter was an impressive $371 million. In years to come, contribution from the Indonesia market is expected to eclipse that of its Australia market.

Free cash flow was $3 billion, an increased of 12% from last year. With this huge war chest, SingTel is able to continue acquiring companies to boost future growth. On 10 April 2017, Amobee, Inc. completed its acquisition of 100% of the share capital of Turn, Inc. for an aggregate consideration of US$290 million after adjustments for working capital and net debt. Turn, Inc., a corporation organised under the laws of Delaware, USA, is a leading provider of a global technology platform for marketers and agencies.

As a growth company, SingTel’s typical weakness is in its weak balance sheet. Current assets were $5.9 billion while current liabilities was $9.2 billion. The culprit was due to the unsecured borrowings of $3 billion to be repayable within one year.

As a big boy, SingTel enjoys a massive investment moat among its peers and thus has good credit reputation. In April 2017, the Group entered into agreements for total credit facilities of approximately S$4.1 billion for general corporate purposes and refinancing of existing facilities.

While I am not against companies borrowing to fund business growth, I would like to see SingTel’s borrowing decrease to a more sustainable level. With the upcoming interest rate hikes, it may be prudent for SingTel to pare down its short term borrowings. Thus, the impending divestment of NetLink Trust is key to address this issue.

NetLink Trust is a business trust in Singapore which designs, builds, owns and operates the passive infrastructure for Singapore’s Next Generation Nationwide Broadband Network (“NextGen NBN”) with Singtel as its sole unitholder. Under IMDA’s requirement,  SingTel is to reduce its stake in NetLink Trust to less than 25% before April 2018. In view of this, SingTel has commenced preparation for an initial public offering of NetLink Trust.

NetLink Trust should be the blockbuster IPO in Singapore stock market and the growth story is indeed compelling. To illustrate this, its EBITDA was $221 million in 2017, an increase of 20% year-on-year. Many analysts estimated that SingTel’s stake could be worth $2 billion. My thoughts that it could be more, probably $3 billion, depending on the IPO performance.

Under normal circumstances, the impending divestment of NetLink Trust and the upcoming dividend payout in August should propel SingTel share price. But many investors must be wondering why the share price remain laggard despite the good news. Based on my observations, three factors may have caused SingTel share price to be bearish.

Firstly, the big boys are out in full force and had been short selling SingTel shares. From 15 to 19 May 2017, 22.2 million shares were shorted, with value of $83 million. From 8 to 12 May 2017, 26 million shares were shorted, with value of $98.2 million. The most ferocious week was 10 to 14 April 2017, when 36.5 million of SingTel shares were short-sold, with total value of $139 million. Incidentally, that was the week when news of TPG Telecom announced its victory of securing the fourth mobile operator rights in Australia.

Indeed, the increased competition could erode SingTel’s regional market share. That was why investors had been dumping shares. While it is too premature to say that SingTel’s downfall is imminent, many investors may not be prepared to pay a premium for SingTel’s shares anymore. Some may feel that it is better to wait until the short-selling activities subside before accumulating the blue chip shares for the purpose of collecting the annual dividends.

Lastly, SingTel’s foray into overseas markets are not without risks as the telco had been engaged in various legal disputes and tax claims amounting to billion of dollars in various countries. This is not surprising as most countries control the telecommunication industry tightly. While this issue is not considered critical at the moment, investors may view it as an uncertainty. Therefore, this explains the weak sentiment on SingTel shares.

Over the years, I had been tracking SingTel shares. Please read my previous articles on this giant:

  1. Short selling on SingTel shares
  2. SingTel shares to rocket on NetLink Trust IPO?
  3. SingTel shares in supreme form

SingTel continues to be one of my favorite stocks but with big boy short-selling the shares, I would avoid entering this counter. In fact, Henderson Global Asia had cut SingTel equity stake in April 2017. Entering this counter now may be risky for me even though there are carrots dangling – dividend payout and the upcoming NetLink Trust divestment. My entry price remains at $3.20 because the way I see it, the decline will continue.

When investing in stocks, it is important to have a strategy in setting the entry and exit price. What is your strategy for SingTel shares? Enjoy the ride.

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Updated: June 25, 2017 — 6:26 am
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