Is it worth investing in SingTel now?

The nightmare continues. Just when investors think that the stock market storm is over, the correction resumes lately. The reality is that business fundamentals don’t change overnight and so does the stock market. China’s slow down began a couple of years ago and not weeks before. The build up to the oil supply glut began a few years ago and not recently. So investors need to be clear that this down-turn is going to be a painfully long winter and it’s not going to go away soon. But amid the bearish market sentiment, there are certainly companies that are worth investing but currently facing price corrections. Among them is SingTel.

The first thing that investors should note is that SingTel is a regional giant that serves more than 550 million mobile customers in Asia, Australia and Africa. This investment moat sets them apart from the other two smaller local rivals, M1 and Starhub. Having this investment moat gives SingTel the economies of scale for procurement and marketing. Most importantly, being the market leader, they are able to influence market trends and set data and mobile plan prices to their advantages.

Over the past one year, the announcement of a fourth telco in Singapore has brought a lot of buzz to the market. Given that the market in Singapore is so small and that there are already three telcos, many expect the new telco operator to provide very competitive prices for their services. This has led to SingTel’s CEO to voice concern over a possible price war. Will this development has a big impact on SingTel’s growth and earnings?

To be fair to SingTel, the impact will be minimal because of their strength and depth. Yes, definitely they will lose some market share but if they can be more innovative in their bundled services, I am sure they are able to retain customers’ loyalties. After all, most mobile plans come with 2 years contract and switching to another telco will incur penalties. This switching cost will represent a formidable entry barrier for the new kid on the block. Thus, if SingTel is able to improve their product offerings and customer’s experiences, the impact of the price war will not be keenly felt for SingTel, at least not for the next few years.

So it is worth buying SingTel shares now? The stock has fallen from a high of $4.46 in April 2015 and is now languishing at $3.63. Investors who bought during the peak in last year would have suffered quite a fair bit of paper losses. Before we ascertain the price to buy, lets delve into the business fundamentals of SingTel.

March 2016 will be the financial year-end closing for SingTel and below is the 5 year trend for the profits:

2011: $3.8 billion

2012: $3.67 billion

2013: $3.61 billion

2014: $3.61 billion

2015: $3.78 billion

Given the current challenging market, it is likely that SingTel will likely post a slightly better annual profits in the range $3.8 to $3.82 billion, subject to foreign currency movements. Thus, the dividend payout should be at least similar to last year’s.

2011: $0.158

2012: $0.158

2013: $0.168

2014: $0.168

2015: $0.175

Therefore, investors who bought SingTel in 2011 at the price range of $3.10 would have made gains of at least $1.50 per share. Personally, I am not vested in this counter but will start to buy SingTel shares if it drops to $2.20. Even though the business fundamentals of SingTel has not changed, the market outlook has changed. I am not convinced that the current price of $3.60 represents the true value of SingTel and expects the price to further decline in light of the challenging market conditions. So it will take many years for SingTel investors to make money from potential price gains. It does not make sense for me to buy at current price only to see it potentially drops by $1.00 and having to wait for 5 years of dividends in order to break even my investment layout.

Magically yours,

SG Wealth Builder