[WIP]Investment Thesis – Singtel (SGX: Z74)

What are the sources of revenue? What are the costs incurred? How has the company fared in these historically?

SingTel’s operations are split into 3 segments: Group Consumer, Group Enterprise, and Group Digital LifeScreen Shot 2018-05-19 at 11.37.05 am.pngScreen Shot 2018-05-19 at 11.35.43 am.png

Note that about 70% of SingTel’s earnings come from earnings outside Singapore. (because of large investments in overseas companies by SingTel, such as those under the “Regional Associates” above)Screen Shot 2018-05-19 at 11.40.56 am.png

Historically, SingTel’s financial performance has been stable. Operating revenue has declined slightly but was offset by steady growth in associates’ pre-tax profits. Note that Optus is (currently) the 2nd largest Australian telco firm wholly owned by SingTel (whereas the “associates” are companies that SingTel has invested in but do not own fully. Refer to the “Regional Associates” above).Screen Shot 2018-05-19 at 11.48.37 am.png

Currently, majority of their revenue comes from the Group Consumer segment.Screen Shot 2018-05-19 at 11.42.05 am.png

What is the nature of competition in the sector/industry? (wrt consumers, suppliers, potential entrants, existing competitors)

SingTel’s main competitors in SG are StarHub and M1 (with TPG Telecom expected to launch end 2018 after successful bid as 4th SG telco).

MOBILE SEGMENT

Currently, SingTel has the largest share of SG’s mobile market revenue, followed by StarHub and M1 respectively.Screen Shot 2018-05-20 at 12.58.29 am.png  (Accessed 20 May 2018)

Mainly still compete by prices and value-for-money. Refer to https://blog.seedly.sg/singapore-telco-plan-comparison-data-price-best-plan/ (Accessed: 20 May 2018) for the cheapest data plans offered for various data needs.

Mobile Virtual Network Operators (MVNOs) are wireless communications services providers that do not own the wireless network infrastructure over which it provides services to its customers. (4 main MVNOs in Singapore by sequence of launch: Circles.Life [M1], Zero Mobile [SingTel], Zero1 [SingTel], MyRepublic [StarHub])

BROADBAND SEGMENT

PAYTV SEGMENT

DIGITAL BUSINESS

CYBER SECURITY SEGMENT

What are their competitive advantages (moats)?

High barriers to entry: 1. High fixed and sunk costs in a telco company. 2. Limited telco licenses by IMDA. 3. Limited spectrum available for bidding (Spectrum are scarce radio frequency resources and are allocated to industries that need the airwaves for communication. Typically, Singapore auctions the rights/licenses to transmit signals over specific spectrum bands)

Switching Costs: 1. Costs of breaking contract. 2. Hassle of having to change phone number if change telco operator.

Evaluation: The high barriers to entry is likely to sustain but it will only limit the number of new entrants into the market (instead of giving SingTel an edge over its competitors). The switching costs can help to retain some customers, but for consumers who have not been using the telco’s services, this would be irrelevant. For such consumers, value (for money) of the telco’s services will be an important determinant for whether SingTel can retain loyal customers. Because of this feature of telcos, unless SingTel can differentiate their products from competitors, SingTel’s pricing power will be very limited. WHAT DIFFERENTIATES SINGTEL FROM COMP?

Can they sustain these competitive advantages (moats)?

The switching costs will likely be the main reason that SingTel is able to retain its customers. However, it does not help in attracting new customers to try SingTel’s products.

Note that in 2016, TPG Telecom won bid to be 4th telco in Singapore besides SingTel, StarHub, and M1. This means new entrants into the industry is still possible and can erode the revenue of existing firms like SingTel. Analysts believe that IPG Telecom will likely launch its commercial service by Dec 2018F.

Are there opportunities for growth in this sector/industry?

SingTel’s management wishes to focus on the below areas to drive growth Screen Shot 2018-05-19 at 12.06.30 pm.png

Do the companies’ moats magnify their benefits from these opportunities for growth?

What are the potential threats to their growth?

MVNOs

TPG Telecom

(Associates?)

Can the company overcome or minimise these threats?

SingTel’s focus on enterprise and digital business diversifies its revenue source to minimise adverse impact of competitors.

70% of net profits are derived overseas. SG-based threats will only affect a minor portion of SingTel’s net profits. For example, FY16/17 saw a rise in underlying net profit partially due to higher associates’ earnings, which offset the decline in the Group’s operating revenue.

What type of returns are they providing investors?

Interim dividends, final ordinary dividends, and sometimes, special dividends.

Company policy of payout ratio btwn 60-75%

Screen Shot 2018-05-20 at 12.33.26 pm.png (Source: SingTel, Accessed 20 May 2018)

Management guidance to pay $0.175 dividends for next 2 financial years (FY18/19 and FY19/20) and thereafter revert to payout ratio at 60-75% of underlying net profits.

Are these returns sustainable into the future?

Management stated that they are “committed to delivering dividends that increase over time with growth in underlying earnings”.

When are these dividend payouts sustainable? When underlying net profits can continue growing at a consistent pace. Given the many growth opportunities for SingTel (mentioned above), this seems plausible.

When are these dividend payouts not sustainable? When there is a disruption to the company’s operations or expenses. An economic recession may not affect SingTel’s operations too badly since majority of their earnings are derived from non-cyclical segments (e.g. you would still need to pay for your mobile data plan even when “times are bad”). Disruption by competitors, however, is very possible.

Are these stocks undervalued relative to their potential returns?

Screen Shot 2018-05-20 at 12.05.38 pm.png

Considering current SingTel share price of $3.41 (accessed: 20 May 2018), shares are trading at a 22% premium against this discounted dividend growth model.

There are 3 main adjustable variables in this model:

(1) Expected Initial Growth (4 years) – Given the company’s policy of paying out 60-75% of underlying net profit as ordinary dividends, this estimate should be based on Compounded Annual Growth Rate (CAGR) of underlying net profits. 5years CAGR = 2.04%, 3years CAGR = 1.78%, YoY growth = 2.3%. Given analysts’ optimistic projections of SingTel’s strategic priorities, assume short term growth of 2.3%.

(2) Expected Terminal Growth – Similar approach as above. Assume long term growth will slowdown to 1.7%. (In general, I assume that long term growth will be slower than short term growth)

(3) Cost of Equity (COE) – I am following Morningstar’s approach of using a generic 10% as the cost of equity.

Screen Shot 2018-05-20 at 12.15.11 pm.png(Note: Sensitivity Analysis is used to see how much a change in each of the adjustable variables will affect the estimated intrinsic stock value)

Using this dividend growth model, I have calculated that SingTel’s current trading price is likely to be overvalued against its intrinsic stock value. However, a cursory look at sginvestors.io (accessed: 20 May 2018) shows that many analysts have set SingTel’s price target at above its current prices.Screen Shot 2018-05-20 at 12.18.59 pm.png (Source: sginvestors.io, Accessed 20 May 2018)

Although I would say that much of their analysis is focused on different aspects than mine, I do think that SingTel’s current share price seems attractive. For one, SingTel is currently trading at 5year PE Ratio lows. Screen Shot 2018-05-20 at 12.24.15 pm.png(Source: ycharts.com, Accessed 20 May 2018)

Also, the strong growth prospects for SingTel mentioned above is good reason to be optimistic about the company’s future ability to grow underlying net profits. The fear about the lack of a strong economic moat over its present competitors may be overdone since historically, this has always been the situation for SG’s telco services.

SingTel Annual Report 2017: https://www.singtel.com/about-Us/investor-relations/annual-reports

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