SingTel

[hongonn]

Hi guys,

Recently Singtel dropped below $3 and started to look attractive to me again. I had a quick check on the financials seems good, margin at 21x, ROE at 16x and PE at undemanding 12.5x. Dividend yield is 5%.

What i like about this telco than the other 2 it has stakes in emerging countries even at the africa. And the CEO was promoted from inside after worked for Singtel for 17 yrs. Also Singtel brand has been good.

The concerns will be the future growth and the competition. Anyone with the industry knowledge please shed some light, is Singtel is too big to grow and restricted by other country regulation? And is the competition so fierce that slashing price is only way in the industry?

PS. 1 interesting thing is i can't find cost of good sold in their income statement, only operating expenses. Are cost of good sold, admin/distribution expenses etc belong to trade secrets in the industry?

[corydorus]

Personally i think Singtel has leptfrog enough. Any growth to be limited within existing bases.
Will be good if they focus internally to create more integrated value to their customer and dividents to shareholders.

[hongonn]

Opps found the cost of goods sold, it is in separate datasheet, management discussion and analysis, not in quarterly result. If take the cost of goods sold + traffic expenses to derive gross margin, the gross margin is 67%, which is not bad. Well i might be wrong calculation :p

[Drizzt]

in an article i written after their latest quarter results came out [article here] i highlighted the difference between them and starhub and m1.

Venturing overseas might not be really high ROE. If you look at the graphs there, operating cashflow no doubt increasing but net profit have been leveling. To cut the long story short, past 10 years have shown that focusing on their developed markets like singapore and australia have yielded higher returns than these.

recent cases of lawsuits and operation problems have shown that it is not always smooth sailing. the myth that they are best because they draw revenue from all over the place is somewhat debunked.

the diversification comes when if revenue goes down in Singapore its offsett by Optus.

The saving grace is that, should they be able to be good managers and improve these emergine market telcos they have, the potential free cashflow improvement can be great.

Singtel is suppose to yield like 7-8% if they pay out most of their cashflow but they chose to go regional. i find its helpful for the business segment.

telco operation is getting very competitive. that diversification makes cashflow predictable which is what investors want most of the time.

if you invest in Sintel you are looking at it as your core holdings, that yield very low growth yet possibly increasing free cashflow at 7% per year. hopefully the div grows from current 4.9% to 5.2 to 5.6 to 6 for the next 4 years.

[corydorus]

Drizzt, I read your article with great interest.

There is one thing i cannot understand. I would think Singapore and Australia are considered Developed Market.
"ARPU for voice will fall." seems doesn't match with current result. What will be the ignition ?

thanks for the indepth analysis.

[hongonn]

Hi Dizzt,

Great analysis you have there, i will take time to dig more info from your website.

1 thing i like about Singtel is their ventures into oversea market. Yes there always have risks but so far their returns have been nice, although not super. I do hope that these oversea market can be the future growth drivers, am i expect too highly? To console myself at least they are still buying telco business, not some funny property or F&B business

If they only resting on local market then i will be concerned, 5m population market there is how much more they can get. Buying m1 or starhub is like just collect your dividend and don't expect too much. Well i can be wrong.

Regarding the lawsuit i guess these type of civil lawsuit will drag on for long time, even there is outcome usually the settlement can be milder. (need not settled in court)

As for the dividend, i don't stress too much on dividend. I treat it as a bonus, 5% is a nice bonus.

[Drizzt]

hi corydorus, i say arpu will fall because in developed markets, they are moving towards 3g or lte. basically its a data based protocol which is why they are promoting internet via mobile network. voice delivery on such a network is a small cost to the telco.

the popular whatsapp, pingchat and skype,fring have made voip and messaging a very possible medium of communication. in actual fact what my friend talked abt that voip will replace traditional voice is very near.

sms is totally redundent now with whatsapp.

given that out of 44 bucks u pay 20 bucks for data and 5 bucks for caller id, u likely pay 19 bucks for voice. when the necessity for voice decreases, would people pay 19 for voice?

i written abit in this article on at & t going to have free us to us voice calling. it goes to show this future may not be far away >> http://www.investmentmoats.com/stock-mar...d-singtel/

hope this helps

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Drizzt, I read your article with great interest.

There is one thing i cannot understand. I would think Singapore and Australia are considered Developed Market.
"ARPU for voice will fall." seems doesn't match with current result. What will be the ignition ?

thanks for the indepth analysis.

Hi Dizzt,

Great analysis you have there, i will take time to dig more info from your website.

1 thing i like about Singtel is their ventures into oversea market. Yes there always have risks but so far their returns have been nice, although not super. I do hope that these oversea market can be the future growth drivers, am i expect too highly? To console myself at least they are still buying telco business, not some funny property or F&B business

If they only resting on local market then i will be concerned, 5m population market there is how much more they can get. Buying m1 or starhub is like just collect your dividend and don't expect too much. Well i can be wrong.

Regarding the lawsuit i guess these type of civil lawsuit will drag on for long time, even there is outcome usually the settlement can be milder. (need not settled in court)

As for the dividend, i don't stress too much on dividend. I treat it as a bonus, 5% is a nice bonus.

hi there, the 5% yield for me is good. heres why. its lower than starhub or m1 but its backed by a more diversified cashflow. this 5% is 2bil and since 2003 their free cashflow have been able to give that. ask me which of the 3 telco likely to carry this tradition.

if they follow what starhub do which is giveout all their fcf, their yield will be around 7.7% which is what starhub is yielding

the kicker is really in all its problems. singtel is doing what telefonica france telecom does in spanning out. if they are great managers, that fcf from these emerging mkt ventures could be the real kicker.

take a look at their cashflow contribution, i notice that these emerging mkt cashflow have been growing this workyear.

on the last note, most of the rich men around the world like li ka shing and carlos slim based their empire on telcos. if telcos are dying, u should see them diversifiying fast

[corydorus]

Hi Drizzt, i agree with lower voice data earning. What i am questioning is profitability wise, result seems to go opposite for maybe other reasons.

Just for discussion purposes on my deductions.


Firstly, Data plan is alot more expensive than Voice plan. 3-4 times easily.

And as the population get more attached to such devices and "new fronters" of data offerings, cheaper unlimited data plan feature will be the future. Assuming double the voice plan pricing for all, is still a significant jump in earnings to Telcos.

This maybe the beginning of higher profitability currently seen in the current Q results which show better earning in More Mature Market like Singapore and Australia ?
Whereas Emerging Marketing sees lesser profit due to more voice plan competition there at cheap plan.

Secondly, Singtel has much bigger muscle to play with external sources to fund if needed. But I doubt Singtel will flex it.
Neither Gov will allow sole player. In a "competitive" oligopoly structure, there is base line dividents to meet and nobody needs to rock it.

Starhub already showup their hand by giving out huge divident. I think this means alot to Singtel and M1.


I can be drastically wrong but I think chances are we are going to see an Evolution of Growth to Telcos to many segments of our society.
There will be tighter integration and Productivity to our lifestyles that most cannot do without infuture.

[chimpy]

Thanks Drizzt for the great analysis.

I remember attending one of the FID roadshows by Singtel some months back where some insti investors questioned about Singtel's EM expansion strategy.

Her (Sock Koong's) answer was simple. Singtel's plan was not to plant a flag in every country. Their strategy was clear - if there were opportunities for good profits to be made, they will be there. But the management is equally comfortable not expanding further if there are no further opportunities down the road. The management would then i) focus on the existing EM ventures and enhance the situation in the respective regions and would also ii) be happy to return money to shareholders.

But as you say, they have the ability to pay dividends (as good as Starhub given similar FCF yield), just that they do not want to, in order to save up for these potential expansions. But with these acquisition targets few and far between these days, I suspect they just might be increasing payout more than what the Street is expecting next quarter.

Caveat Emptor.

Vested.

first post btw. been a speculator through the WallStraits, afralug and now Valuebuddies days.. till now.. Cheers to good value investing!

[Drizzt]

Hi Drizzt, i agree with lower voice data earning. What i am questioning is profitability wise, result seems to go opposite for maybe other reasons.

Just for discussion purposes on my deductions.


Firstly, Data plan is alot more expensive than Voice plan. 3-4 times easily.

And as the population get more attached to such devices and "new fronters" of data offerings, cheaper unlimited data plan feature will be the future. Assuming double the voice plan pricing for all, is still a significant jump in earnings to Telcos.

This maybe the beginning of higher profitability currently seen in the current Q results which show better earning in More Mature Market like Singapore and Australia ?
Whereas Emerging Marketing sees lesser profit due to more voice plan competition there at cheap plan.

Secondly, Singtel has much bigger muscle to play with external sources to fund if needed. But I doubt Singtel will flex it.
Neither Gov will allow sole player. In a "competitive" oligopoly structure, there is base line dividents to meet and nobody needs to rock it.

Starhub already showup their hand by giving out huge divident. I think this means alot to Singtel and M1.


I can be drastically wrong but I think chances are we are going to see an Evolution of Growth to Telcos to many segments of our society.
There will be tighter integration and Productivity to our lifestyles that most cannot do without infuture.

hi corydorus,

i think we can learn from past implementation of 2.5G and 3G local telcos have experience in making mass adoption successful. IDA have also make license auction beneficial.

The cost of network equipment to set up 3G or LTE is probably much lower than the older technologies. What likely means is that CAPEx might be reduced. But lets not kid ourselves here. In the future all the pipes from the 3 telcos will look the same and everyone might need to fulfill quality of service which might translate to more or better cell stations = more capex. Singtel is in a good position because they have a better financial position as per market cap.

one caveat is that it is dangerous to assume that in emerging markets 3G will take off. most likely they are still very far off from that. I have no doubts that Singtel or its partners should be very careful not to deploy these too early.

Singtel's plan is really to stabilitse and be competitive in these emerging markets. grab at least the top 3 telco in each region and create synergies. That way they will let the cash generating nature of the business take over, thereby increasing cashflow.

As shareholders, we get the most benefit here when they improve their ROE or ROIC really, not additional emerging market investments.

Mobile Data is very exciting and this is really the wave that really pushes computing to a whole different level.

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Thanks Drizzt for the great analysis.

I remember attending one of the FID roadshows by Singtel some months back where some insti investors questioned about Singtel's EM expansion strategy.

Her (Sock Koong's) answer was simple. Singtel's plan was not to plant a flag in every country. Their strategy was clear - if there were opportunities for good profits to be made, they will be there. But the management is equally comfortable not expanding further if there are no further opportunities down the road. The management would then i) focus on the existing EM ventures and enhance the situation in the respective regions and would also ii) be happy to return money to shareholders.

But as you say, they have the ability to pay dividends (as good as Starhub given similar FCF yield), just that they do not want to, in order to save up for these potential expansions. But with these acquisition targets few and far between these days, I suspect they just might be increasing payout more than what the Street is expecting next quarter.

Caveat Emptor.

Vested.

first post btw. been a speculator through the WallStraits, afralug and now Valuebuddies days.. till now.. Cheers to good value investing!

hi chimpy thanks for making this your first post. i really like the direction of discussion here, no malice and just discussion and arguments for the sake of making everything as transparent as possible.

the key for them to raising payouts is really when they see their emerging markets cashflow and current cashflow increasing. for the past years they have excess FCF so its safe. in fact, out of the 3 of them, this 4.9% yield looks the safest (but damn its the lowest)

they might not raise it if the AIS 600 mil needs to be paid up.

I suspect these ex army managers mandate sometimes. All these GLC or TLC seem bent on putting their flag all over the place. Does ROE actually improves? i havent really see if it adds value.

I think its just an answer to appease that investor, they just set out to acquire but that might not be a wrong strategy. buy these assets and get kick start straight away.

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For all interested investors i did a lengthy piece comparing the 3 telcos and the likely future direction of telco industry based on Morgan Stanley's report. it can be found here >> A Guide to Dividend Investing in Singapore Telecom Stocks

one interesting thing is that over the weekend The Edge interviewed Aberdeen Asset Management and most people know that they lean closer to being value investors. Their core holding includes Singtel and China Mobile, 2 telco leaders in their home country.