Investment Thesis – SingTel (SGX:Z74) Concise Version

Understanding the business

SingTel has 3 business segments: Group Consumer, Group Enterprise, and Group Digital Life.

Group Consumer is SingTel’s largest business segment, accounting for 57.3% of SingTel Group’s FY17 operating revenue (9572m/16711m). It comprises SingTel’s consumer businesses in Singapore & Australia and their investments in regional telco companies. These businesses provide services like mobile, pay TV, fixed broadband, voice data, and sales of equipment. SingTel’s Singapore consumer division is a market leader with 51.8% of Singapore’s mobile market revenue. SingTel’s Australian consumer division (under Optus) is the 2nd largest telco in Australia with 30% market share. Many of SingTel’s regional associates are also market leaders in their respective markets. About 70% of SingTel’s earnings are derived from operations outside of Singapore.

Group Enterprise is SingTel’s second largest business segment, accounting for 39.5% of SingTel Group’s FY17 operating revenue (6600m/16711m). This segment focuses on providing IT solutions to the government and corporations. The main areas that this segment focuses on are InfoComm and Tech (ICT), Cyber Security, Enterprise Cloud Services, and Smart Cities.

Group Digital Life is SingTel’s smallest business segment, accounting for 3.2% of SingTel Group’s FY17 operating revenue (539m/16711m). This segment focuses on providing 3 services through 3 brands: Premium video streaming (under HOOQ), Digital marketing (under Amobee), and Data analytics (under DataSpark).

Strengths

SingTel is a cash cow with Free Cash Flow (FCF) of $3billion and a FCF Yield of 5.6% (3.054b/(3.33*16.32b)). Current dividend yields are at 5.3% (.175/3.33). SingTel is the only SG telco with FCF yield > dividend yield, which translates to dividend safety in the long run.

SingTel has maintained underlying net profit margins at above 20% for past 5 years (FY17 at 23.4%) which is larger than competitor’s (StarHub 15%, M1 14%).

SingTel has sustained growing dividends even through the 07-09 Financial Crisis, showing their resilience to recessions.

Debt-to-cash flow is low at 1.95 based on OCF (10384m/5314m) and 3.4 based on FCF (10384m/3054m). Anything below 3 (based on OCF) is acceptable.

Given how majority of their revenue is derived overseas, the entrance of 4th telco (TPG Telecom) in SG will only affect SingTel’s margins minimally.

Weaknesses

SingTel’s dividend payout ratio against underlying net profits is at 71.9% (17.5/24.35), which is on the higher end of management’s commitment to paying out 60-75% of underlying net profits as dividends.

Operating revenue has seen a gradual decrease over the last 3 years (2015: 17223, 2016: 16961, 2017: 16711).

SingTel has relatively lower dividend yield of 5.3% versus that of competitors (Starhub 7.7%, M1 6.5%).

SingTel has relatively lower ROE of 20% versus that of competitors (Starhub 51%, M1 32%).

Opportunities

SingTel’s Cyber Security business is expected to see strong growth.

SingTel’s Group Digital Life businesses are expected to see strong growth.

Threats

Competition from MVNOs and 4th SG telco is seen to erode revenue.

Trouble with regional associates may erode revenue.

Currency depreciation may erode short term revenue (but does not affect fundamentals of company)

Valuation

Screen Shot 2018-05-20 at 12.24.15 pm
(Source: ycharts.com, accessed 20 May 2018)

Current prices reflect PE Ratios at historical lows.

SingTel (SGX Z74) Valuation 28052018.jpg

Current price of $3.33 is below intrinsic value by 18.2%.

For Cost of Equity, I used a risk free rate of return at 3% (based on 30yr SG Treasury Bonds) and market historical rate of return at 7%. Yahoo finance displayed beta of 0.72 while Reuters displayed beta of 0.9, chose reuter’s higher beta for more conservative estimate.

SingTel (SGX Z74) underlying net profits CAGR 28052018.jpg

For expected initial growth rate, I used YoY underlying net profit growth rate of 2.89%. For expected terminal growth rate, I used 10 year underlying net profit CAGR of 0.69%.

SingTel (SGX Z74) Valuation Sensitivity Analysis 28052018.jpg

Notice from the sensitivity analysis that lowering any of the parameters unilaterally by 1 percentage point mostly maintains a higher intrinsic value per share than current prices.

Screen Shot 2018-05-20 at 12.18.59 pm
(Source: sginvestors.io, accessed 20 May 2018)

Analyst estimates of target share price (retrieved from sginvestors.io) mostly agree with current share prices being undervalued.

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