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Can SingTel fight gravity?

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Hailed by many analysts as Asia top telecommunication company, SingTel is facing heightened competition from emerging players seeking to knock it from the perch. Australia’s TPG Telecom stunned the market by not only becoming Singapore’s 4th telecommunication player in late 2016, but also Australia’s 4th telecommunication player in early 2017. Given the increased competition in Singapore, Australia and India, can SingTel fight gravity?

To put things into perspective, SingTel did not sleep walk into the dominant position in Asia by chance. Listed in SGX main board back in 1993, the company embarked on a slew of overseas acquisitions spree, with backing from Singapore sovereign wealth fund, Temasek Holdings.

As a result, SingTel enjoyed a massive investment moat of 600 million mobile phone subscribers across South East Asia countries like India, Philippines, Thailand, Indonesia, Singapore and Australia. This is an impressive feat that took more than 24 years to establish. In this regard, it is unlikely that TPG Telecom’s entry would pose short-term threat to SingTel.

In Singapore, the telecom industry is regulated by IMDA. When the regulator announced that a fourth license would be issued a couple of years ago, many investors and industry players were puzzled. While consumers certainly wish for a price war in light of the increased competition, having four players in Singapore wireless market does not make sense. After all, with a population of 5 million, Singapore’s market is just too small and saturated for another mobile phone player to gain a meaningful foothold.

SingTel

The local pie is just not big enough for the new firm to generate efficient network scale and earn reasonable returns on invested capital. Indeed, scaling is important as it allows telecom players to efficiently deploy new network technologies, reduce overhead costs and marketing costs. For TPG Telecom, it needs to roll out the entire network from scratch after winning the spectrum rights from IMDA.

Although analysts may argue that the network deployment would not be a challenge in a small country like Singapore, it should be noted that IMDA set very high service standards for telco players. For example, operators must ensure 4G networks cover at least 95% of outdoor areas, increasing to 99% from July 2017. For a new player to achieve this requirement is an uphill task and would certainly take massive investment and resources. Furthermore, in about 5 years, the new 5G network is expected to be rolled out. So by the time TPG Telecom roll out its entire 4G network in Singapore, the trend could be on 5G technology already.

According to SingTel’s 2014 sustainability report, it still control significant market share in Singapore, with 82% of the fixed line market, 47% of the mobile market and 43% of the broadband market. Being the big boy, it is unlikely that its market share would be eroded by the entry of TPG Telecom in Singapore. The large subscriber base has allowed SingTel to enjoy a formidable investment moat that ward off competition. The likely victims could be the smaller players – Starhub and M1.

Nevertheless, in 2016, all the telco players slashed mobile data prices for post-paid users for higher end data subscription by 25% to 50%. In doing so, revenues are expected to decline for all players in the foreseeable future. This trend signaled that the incumbent operators would defend their market shares at all cost, even to the extent of sacrificing revenue. However, the impact for SingTel should be the minimum among the three players in Singapore because it derives the bulk of its earnings from regional countries.

Unlike Starhub and M1, Singtel’s strategy has always being penetrating large markets with significant economic fundamentals (young work force with good earning abilities). Optus, its Australian subsidiary, remains a key revenue contributor. Therefore, the entry of TPG Telecom in Australia is worrying for SingTel because Australia is an important market.

For SingTel to win the game, it is not wise to continue to engage a price war with TPG Telecom. This is because this sort of approach may inflict collateral damage to its brand and hurt profit margins. Instead, it should continue to entrench customer loyalty by developing innovative products and services in green fields like cybersecurity, pay TV and smart phone portfolio. For example, it could enter into exclusive deals to launch the latest Iphone or Samsung mobile phone models. Its recent partnerships with Alibaba on Cloud Access services is also a step in the right direction. Fundamentally, the key should be to win more customers and retain subscribers.

At the end of the day, customers are willing to pay a premium for quality and innovative services. There is no point in providing cheap data plans with consistent unreliable network connections. To ward off the competition from TPG Telecom in Australia, SingTel must continue to invest in infrastructure so as to continue providing high level of reliable telecom services. To achieve this, it needs additional capital to win the battle. The upcoming divestment of NetLink Trust could be the solution.

Regarded as the mega IPO of the year, 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 and the IPO application had been approved by SGX.

With the cash proceeds of about $2 billion, SingTel has a substantial war-chest to go on the offensive against TPG Telecom. The management could consider using the cash to further develop its infrastructure investments in Australia through its Optus unit or penetrate new markets like China and Vietnam.

Ideally, I would prefer SingTel to use the cash proceeds from NetLink Trust divestment to pay off its debt. Current assets were $5.9 billion while current liabilities stood at $9.2 billion. The culprit was due to the unsecured borrowings of $3 billion to be repayable within one year. However, such approach would not help to expand SingTel’s investment moat. In view of the challenge of TPG Telecom, now is the time for SingTel to launch a pre-emptive strike before its opponent erode its market share.

The window of opportunity is still there before TPG Telecom close the gap. SingTel must seize the chance to increase its investment moat to protect its market share before time runs out.

Read my other articles on SingTel:

  1. SingTel’s NetLink Trust IPO application approved
  2. SingTel at a cross road
  3. Short selling on SingTel shares
  4. SingTel shares to rocket on NetLink Trust IPO?
  5. SingTel share in supreme form
  6. SingTel increased investment moat aggressively

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1 Comment

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  1. Singtel has about 16 billion shareholders. If takes $1.6b to return to sharholders then each will get around 10 cents, another 2% return. Hope my numbers are correct!

    I am Involved in Singapore market approx 5 Year’s. Right now I am Getting stock tips from Financial Advisory and I am doing happy Trading…

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