Re-examining Singtel (Z74): Two Years Later

Hey, guys - it's been a while. I've been busy with personal consulting projects, so I haven't had a chance to take a proper look at my investment portfolio. I felt there was no better way to start than by re-analyzing Singtel (Z74), a company that I first analyzed in May of 2017. The aim here is to examine how the company's circumstances have changed after two years.

What I'm Hoping To See

My portfolio is mostly geared towards the 'Smart Nation' idea - this means I am interested in companies that have a strong focus on technology and data services. I am hoping to see that Singtel has made developments in any of these areas:

(1) Digital Technology Advancement
(2) Data Analytics
(3) Cyber-security

I am expecting an increased demand for data and digital services, so I am hoping to see these services constitute a larger share of Singtel's bottom-line. I am also hoping to see stronger performance from regional associates.

The Recap

When I last left off in mid-2017, Singtel had been facing stiff pressure overseas as investments (e.g. Bharti Airtel [India] & Telkomsel [Indonesia] and subsidiaries (e.g. Optus [Australia]) alike encountered increased competition. Early 2017 saw Singtel's share price dip to the $3.70+ region from $4 after international fund managers sold off their Singtel holdings due to concerns over increased regional competition. Singtel had the most internationally-diversified portfolio out of the 3 local Telcos, which meant heightened exposure to foreign investment risk. At the time, TPG Telecom stepped up expansion plans in Australia, directly threatening Singtel-owned Optus (the second largest telco in Australia). UK's Vodafone completed a merger of its Indian subsidiary with a competitor to form Vodafone Idea, which became India's largest wireless telecom carrier, thus unseating former leader Bharti Airtel in the process. Singtel also faced the prospect of increased local competition due to TPG's entrance into the Singapore market at the time.

3QFY17 results revealed a net profit of S$994 million.

The Current Situation

The onset is not rosy, with net profit of 3QFY19 disclosed at S$823 million, a sharp decrease from the $994 million from two years ago. This represents an almost 17% decrease in net profit over two years. In Singapore, revenue from mobile services and equipment sales has decreased by 6% from the same period in FY18, but this has been mitigated by increased data usage. This has resulted in a stagnant revenue figure of S$4.63 billion. Singtel's share price has suffered as well, closing at $3.02 on 28th Feb - this is a slight recovery from the $2.90+ range that Singtel touched some time ago. With the second Trump-Kim summit having apparently failed, world markets have gone down, and I expect to see Singtel's price either head downwards or remain in the $3.00+ range in the near future as macro trends take hold.

Overseas competition continues to plague Singtel, with investments in Bharti Airtel suffering the most - the Indian telco giant produced a S$129 million loss in profit before tax (PBT). This stems from pricing pressures in the mobile market, as new competitor Reliance Jio has effectively stolen part of Airtel's consumer base. There are talks ongoing of Airtel possibly entering into a joint venture with rival Vodafone Idea (mentioned in The Recap above) in order to go toe-to-toe with Reliance Jio in the optical fibre space. Telkomsel, however, exhibited recovery with S$305 million positive PBT, which helped to buoy profit figures for Singtel. While the Indonesian market has shown signs of delayed recovery, I expect continued trouble from the Indian market, unless actions are taken to combat Reliance Jio's entrance into the market. To that end, I hope to see more news about Airtel's joint venture with Vodafone.

Source: Singtel 3QFY19 Announcement

In spite of poor performance from regional associates, there is a silver lining in Singtel's digital arm. Group Digital Life (GDL), established in 2012 to focus on technologies for digital disruption, has begun an initiative to introduce video streaming on Grab's platform through HOOQ, a joint venture from Sony, Warner Brothers, and Singtel. GDL has also been focused on pursuing distribution partnerships with various counterparties, but these partnerships could take time to bear fruit.

TPG Telecom has not covered much ground in Singapore since 2017. Recently, the telco announced a year-long trial that offered subscribers free mobile services, indicating that it is still actively trying to encourage usage of TPG services. Singtel could potentially expect lower revenue from Singapore voice services as TPG steps up marketing and advertising.

Source: Singtel.com

Singtel has continued to secure partnerships in the gaming/e-sports industry as part of its digital service strategy. Singtel has also partnered with China Mobile to improve the "Internet of Things (IoT) network infrastructure across the Asia Pacific region," as quoted from the Straits Times. For the uninitiated, an IoT network is a network of devices that have features that allow them to connect, interact, and share data. These devices are typically not connected to the Internet (e.g. vehicles, home appliances, etc) instead of devices like smartphones and computers. Singtel's head of IoT has mentioned that this partnership will allow for economies of scale for both companies. Furthermore, revenue from Singtel's cyber-security services has continued to increase, as well.

Using the Gordon Growth Model (DDM) with a slow growth rate (g) of 0.825% (ROE x Retention Ratio), a price of $3.21 is derived.

Going Forward

I expect Singtel's price to dip below $3.00 in the short term due to macro trends and continued regional pressure to associates. As things progress, we might see a further drop to the $2.80 - $2.90 region. At this point, I see no point in liquidating, as annual dividend yield has been 5-6%. I'll continue to keep my holdings and take another look at Singtel further down the road.

Until next time.


Creed