Singtel’s net profit after tax fell 65% year-on-year in its latest financial year (FY20) report. Proposed final dividend dropped from 17.5 cents to 12.25 cents. The last time we saw this was in 2009. The share price of Singtel has also been on a downtrend since its peak of $4.58 in April 2015. After knowing all these, do you think Singtel is still a good buy right now? Here are my quick thoughts on it.
Singtel was one of my maiden posts when I first started TheBabylonians. You can read more about it in detail here to get a little bit of context. I thought it would be interesting to re-look at some of the things I have said in 2018. Then re-evaluate on whether Singtel is still a good buy.
1. Singtel Recent Developments
Before we begin, let’s have a quick look at what has changed for Singtel.
Firstly, Singtel’s effective interest in Bharti Airtel has fallen from 40% to 35%. This is due to the recent Bharti Airtel’s rights issue where a part of it was renunciate to GIC. Basically GIC chipped in with $700 million to take about 4% of the interest in Bharti Airtel. It is probably to help relieve some of the funding pressure from Singtel to help them conserve working capital and cash.
Secondly, telecom operators in India all hike mobile tariffs up. Bharti Airtel’s price plan increase by up to 42%, Vodafone increase by about 20% and Reliance Jio went up by 40%.
Thirdly, Facebook invested $5.7 billion for a 9.99% stake in Reliance Jio. No love for Bharti Airtel.
Fourthly, Singtel won the license to build two nationwide 5G networks. Their competitor is StarHub-M1 joint venture. The target is to have 5G network coverage for more than half of Singapore’s population by the end of 2022.
Fifthly, Fitch downgrades Singtel’s rating to A from A+ and Optus’s rating to A- from A. The downgrade reflects weaker-than-expected growth prospects and high capital expenditure pressure. However, Fitch maintains a stable outlook for both Singtel and Optus.
Sixthly, Singtel has partnered up with Grab for a digital full banking license in Singapore. Grab will hold a 60% stake while Singtel holds 40%. Successful bidders would be expected to commence business by mid-2021.
Lastly, Temasek’s interest in Singtel remain unchanged at 52.3% and CPF owns about 5.1% of it. So no worries. The parent/Singapore Government has not abandoned the child/Singtel.
2. The Dividend Yield Trap
Most people look at Singtel because it is government-backed and their dividend yield is attractive. I too started off saying how Singtel has become an attractive yield play at around 5.8%. (*Based on 17.5 cents dividend). This is comparable to many of the retail REITs out there. That statement was made in 2018.
In 2020, the dividend yield of Singtel went as high as 7.4% during the big sell-off. Then it stabilises to between 6%-7%. Which is still quite high and attractive. That might have pulled in many of the investors between the price of $2.60 – $2.80.
However, total dividends for FY20 fell to 12.25 cents. Using the latest share price of $2.55, the dividend yield has plummeted sharply to 4.8%. This is way too low for me personally as an investor.
If I am looking at a dividend yield of 4.8%, I want to be holding super solid and stable assets like Parkway Life REIT or Keppel Data Centre REIT. These are the assets that give really stable recurring income. But definitely not Singtel. Singtel has a lot of issues as we will see later.
So if we are talking purely from a dividend yield angle, the current price of $2.55 is clearly a no-go. Given that the telco industry is in a structural decline, yield definitely has to be higher to compensate for that risk. If we are talking about 6% to 7% dividend yield, then the share price of Singtel should fall to the range of $1.78 – $2.10. That is from a pure yield perspective without considering any other factors.
3. Singtel’s Business Segments
*Figures are extracted from S&P Capital IQ
Next, I went on to talk about each of the Singtel’s business segment, Consumer, Enterprise and Digital Life. Here is how each of the segment has performed over the last 7 years. I only have data from 2013 as that was the time when Singtel did a restructuring to come up with these new categories.
Group Consumer Revenue is totally falling off the cliff. Group Enterprise Revenue has been strong till 2017, then it started falling also. The only thing up is Group Digital Life Revenue. But Group Digital Life only makes up about 7% of the Singtel’s total revenue. So it is quite immaterial.
And also we are just talking about revenue. This Group Digital Life is like a start-up which invests in the latest trending technologies. It has yet to reach a break-even point. Their main businesses are Amobee (digital advertising), DataSpark (data analytics) and Innov8 (innovation venture).
If we look at EBITDA, you can see that Group Digital Life is still at a negative. The other two, Consumer and Enterprise, is just showing terrible financial performance. Definitely not as sturdy and stable as we all like to think. Let’s dive deeper into all the financial metrics and ratios.
4. Singtel’s Financial Performance
Here is a quick look at Singtel’s financial performance over the past 10 years. Revenue, Gross Profit, Operating Income and Net Income. Everything was worse than it was in 2010 and everything is on a downtrend. This should give you a hint that the telco industry is struggling.
What you are seeing is not a sign of a defensive sector and neither is it a characteristic of a company with a strong economic moat. It looks more like a company trying to stay relevant in the midst of changing technological & consumer trends. Remember that nothing stays permanent.
Basic EPS has been pretty flattish also because net income is not moving up. Except for 2018 when they divested Netlink Trust. However, things started to go downhill from 2019 largely because of Airtel. Dividends per share have also been flat since 2015 before falling drastically to 12.25 cents. Again, no strong bullish financial performance here. Just a flat chart tanking throughout the years before breaking down.
5. Singtel’s Profitability Margins
Here is a look at their profitability Margins. Singtel is able to maintain its margins quite consistently over the years. However, in 2018 it all started going down, similar to what we have seen above. If you want to exclude the exceptional provisions for regulatory costs from Bahartir Airtel, just look at the gross margin and EBITDA margin. It is down year-on-year also.
6. Singtel’s Liquidity Position
Singtel’s cashflow is looking strong and solid. It is pretty stable and consistent but it is not increasing in the long-run. There is a conservative buffer between what was earned and paid out as dividends. So I am not too worried about it.
However, Singtel’s debt position has spiked up after they borrowed $4.17 billion in April 2020. The rationale was for general corporate purposes and refinancing of existing liabilities.
As a result, you can see that total debt to capital has gone up from about 26% to 34.5%. Net debt to EBTIDA has also gone up to 2.91. This simply means for every dollar in EBITDA they earned, there is about $3 that needs to be repaid.
Interest coverage ratio such as EBITDA to interest expense has also been falling. Earnings are lower but interest expenses are higher. Though 10 is still a relatively good number, the trend is downwards. If we look at EBITDA less CAPEX, which is a more accurate representation of available cash, it is about 5.6.
It is not looking rosy. And they have just doubled down by taking on billions of debt. Can they generate higher returns from this new supply of money? Let’s look at the track record of Singtel’s efficiency ratios.
7. Singtel’s Efficiency Ratios
How efficient is management utilizing capital to generate returns? Not looking very positive either. Looking at the Return on Assets, Singtel has invested on average $2 billion on CAPEX each year and total assets have been steadily increasing. But yet earnings are not keeping up.
In fact, it got all eaten up by depreciation and amortization costs. If you look back at the recent financial results release, the reason for the fall in earnings is always partly attributed to higher depreciation costs. Depreciation as a % of revenue has risen from 11.1% in 2010 to 15.6% in 2020. That is a 4.5% margin difference or hundreds of millions.
How about Return on Capital. How efficient are they in using money from debt and equity holders to generate returns. Again. Not good. Both ROA and ROC has fallen by 50% from 2010. ROC is only about 3% in 2020. This means if they borrowed at an average interest rate of above 3%, Singtel is essentially destroying shareholder’s value.
Same goes for ROE. Generally, you want to look for ROE between 15% to 20%. Anything below 10% is a company that has a really weak financial performance.
So what happened to Singtel? Why is everything going down?
8. Changing Telco Landscape
Let’s talk about the obvious.
Firstly, traditional telco’s core communication service such as voice, international video calls, messaging has clearly been replaced by WhatsApp, Telegram, Facebook, WeChat & Zoom. These services used to make up a huge chunk of telco’s revenue. It is gone now.
Secondly, cable TV is no longer in demand as it loses its appeal to Over-The-Top Content (OTT) players like Netflix, YouTube, Amazon Prime Video, Disney+ and etc. That’s why Singtel’s HOOQ (their video-on-demand service) just gone into liquidation. It simply can’t compete with the big boys. Again, we see another huge chunk of telco’s revenue gone.
OTT players have cannibalised a lion’s share of telcos’ revenue and average revenue per user (ARPU) has been falling across every region. The business models of OTT players are much more robust and innovative. Their offerings are better, cheaper and they are just getting started. This will definitely put further downward pressure on incumbent telco’s margin.
Thirdly, the business model has changed. The new entrants of Mobile Virtual Network Operators (MVNOs) have disrupted traditional pricing plans. MVNOs do not own or operate any network infrastructure. They only lease it from Singtel, Starhub or M1. The only difference is MVNOs plans are much cheaper. As a result, these traditional telcos are losing market share and revenue from sales of phones and plans.
Gone were the days where people pay for an expensive post-paid contract to get a subsidy on a phone after 2 years. Now the trend is moving towards off-contract, SIM-only plans where you get MORE data at a much lower cost.
The above three reasons probably explain why Singtel’s financial performance is on a downhill. And this trend applies across the globe, not just in Singapore. What used to be a commoditised service is now free. People just move on to things that are cheaper, faster and better. That is just the way of life and the only thing people want from Singtel is just mobile data and broadband. That’s it.
9. Growth Catalyst for Singtel
Now that we have covered the FUD, let’s cover the FOMO.
9.1 The Future of 5G
Firstly, 5G is coming and we are entering a new era. In just two quarters, South Korea telco operators such as SK Telecom, KT & LG U+ has reported an increase in ARPU (0.5% – 1.7%) due to the adoption of 5G. China Mobile has also seen a 6.5% increase in ARPU on average for customers who have migrated to 5G. China Telecom also saw an uptick in ARPU from its 5G customers by around 10%. This could be an early hint that 5G might bring about positive impact on APRU.
What excites me the most is probably the potential use case of 5G. 5G forms the backbone of the Internet of Things (IoT). It enables millions of devices to be connected and communicate with each other. This could definitely create new revenue opportunities for Singtel.
Imagine instead of a million people using 4G, you now have a billion machines using 5G. Industrial factories, warehouses, ports and etc. would all rush onboard to explore the use-case of 5G to stay competitive. And more projects would also come to Singtel’s Enterprise from Singapore’s Smart Nation initiative.
A report by Cisco and consulting firm A.T. Kearney estimate that the revenue of Singapore telcos could increase by up to $704 million from 5G by 2025. However, all these are just speculations just like blockchain. There is no guidance on 5G CAPEX spending and it is still premature to tell how much value would materialise.
Though, one of the reasons cited for the dividend cut is to conserve capital for 5G investments. We have to wait until IMDA release the network & spectrum availability details which will be around 2021. So I think they are conserving dividends payout to prepare the groundworks of 5G in 2021.
The good news is TPG Telecom doesn’t have the contractual license to provide 5G service yet. This should give Singtel a headstart to capture the 5G market share and capitalise on this opportunity.
9.2 Singtel Digital Banking License
Next, we have Singtel partnering up with Grab for a digital banking license. Grab is an extremely strong partner and I think both Singtel & Grab would make a good synergy.
Their target segment would be digital-first customers who want greater convenience and personalisation as well as SMEs who lack access to credit. You can imagine Grab application to include loan features like those China Super Apps (WeChat, AliPay & Meituan Dianping)
Assuming we add up all the net interest income from the 3 big banks, DBS, OCBC and UOB. That would total up to be about $22 billion! And let’s say Singtel-Grab only captured a conservative market share of 1%. That is already worth about $220 million. If we apportion them up, Singtel would get about $88 million into their pocket.
9.3 Recovery in Associates’ Earnings
Apart from Singapore & Australia, Singtel also invested some stakes in other major telco companies all around the world. It has 35% interest in Bharti Airtel (India), 23% in AIS (Thailand), 21% in Intouch (Thailand), 47% in Globe (Philippines) and 35% interest in Telkomsel (Indonesia).
DBS Group Research Equity has found that there is a 0.77 positive correlation between the share price of Singtel and associate profits. You can see that associate profits might have bottomed out and it is showing signs of recovery in recent quarters. Statistically speaking, if associate profits continue ticking up, it is likely that Singtel’s share price will rise along with it.
In the latest quarter Q4 FY20 results, regional associates have performed well as profits before tax rose by 15% Y-o-Y, or 10% assuming constant exchange rates from FY 2019. In fact, it is the only line-item that is up while Singapore and Australia are either flat or down. So we might be seeing a turnaround in associates earnings moving forward.
10. Is Singtel still a Good Buy?
So is Singtel still a good buy? I think that Singtel’s business fundamentals look pretty bad. It is not a one-time exceptional loss or what, but more of a structural decline that is playing out throughout the years. The value that telco can provide is eroding. Communication and content are out of the picture.
The only remaining bits are data and broadband. Even then, the market for data is also highly competitive and it is a throat-cutting, price war game. Every MVNOs and competitors are competing to come up with cheaper, better plans. That’s why telco operators everywhere are seeing falling margins.
However, the silver lining for Singtel is 5G and the digital banking license. For 5G, while the opportunities are massive, it is still super early to evaluate the cost-to-benefit ratio. 5G requires heavy CAPEX investment and there better be a pipeline of use case before management would commit. It is also an emerging technology and that means it could easily run into technical feasibility issues. We need to see how successful 5G plays out in China and South Korea. That is the only 2 countries that have gone live.
The digital banking license game is much easier to pull it off. It would be interesting to see how all these works. But again, banking is not their core service and profits here would only serve as complementary support to their earnings. Probably less than 5% in the early years of operations. The main growth catalyst should come from 5G and internet connectivity.
Weighing both the goods and bads, I am more bearish than bullish for now. The only way telco companies can emerge as winning stocks is when 5G really takes off. When you see billions of devices consuming extremely fast and high data usage from telco providers. That is when Singtel would go above $5. If not, Singtel would probably continue its trajectory going downhill or stay flat to protect its margins.