1. Why Singtel?
I started looking into Singtel more closely when its trailing annual dividend yield started creeping up above 5.8%. That’s almost equivalent to investing in a retail REIT, or even higher! A high dividend yield may not necessarily be a good thing as often times it could meant bad news or poor business that led to major sell-off and plunging share prices. However, if its a good solid fundamental stock that is being sold off, then it might represent a financial OPPORTUNITY to accumulate.
Secondly, Phillip SING Income ETF, an ETF that focuses on 30 high quality income stocks, has Singtel as its LARGEST portfolio holdings of 10.2%. The underpinning factors that qualify for the SING Income ETF includes Business quality with competitive advantage, Financial health that has an iron clad of balance sheet and stable companies with high dividend yields. After considering all these factors, you can imagine the perceived quality of Singtel stock given that it comes off first, outranking banking stocks based on portfolio-weight. Here is a look at the stocks under Phillip SING Income ETF.
Thirdly, Temasek Holdings has a 52.3% ownership interest in Singtel. (In times of difficulty, a parent seldom lets the child suffer)
Fourthly, let’s look at the technical charts of Singtel over a monthly time frame. This is a very STRONG chart because it’s on a very high level time frame. A monthly time frame is suitable for long-term investors because it excludes all short-term volatility and noise signal. The closing price of $2.96 has just breached its 200-MONTH moving average which acts as a support. By the way, a 200-month MA on a monthly time-frame is a very powerful support (it is Singtel’s average price over the past 200 months or 16.6 years!). I do not think it would be broken easily but i may be wrong as we are on a late-stage bull run and fear/uncertainty/doubt (FUD) are high. If by end of Dec, buying volume still doesn’t come in and price can’t close above the 200 MA, then we are in for a rough ride as that means the GOLDEN DEATH CROSS. Apart from the 200 MA support, there is an additional horizontal resistance turned support line between the price zone of 2.60 – 2.80. I would expect strong buying volume around this price zone.
Alright, enough of system 1 thinking. Let’s dive deeper down into system 2 thinking and evaluate if Singtel is indeed a solid business or are there any important things that we are not aware of.
2. Singtel Business Overview
To start off, Singtel has 3 MAIN business segments which can be classified into Group Consumer, Group Enterprise and Group Digital Life.
a) Group Consumer
Group consumer is the one we are most familiar with, this is our mobile plans, re-contracts, broad band modem, Singtel TV etc. Of course that is only in Singapore. Singtel is a global player aiming to be the best communications company in Asia-Pacific region. Majority (70%) of its operation earnings are derived from Overseas. Singtel also has a wholly-owned subsidiary, Optus in Australia where they are the 2nd largest Telco operator . In July 2017, Optus carried out the LARGEST capital expenditure programme spending $1 billion to improve and expand mobile coverage in rural and regional Australia. They are also delivering a 5G trial that will begin in early 2019. If implementation are successful, they would move on to the second phase of 5G which will focus on mobility an mass machine. This is a win-win situation for Singapore as well because proprietary information and technology updates are shared across internally within Singtel Group.
Singtel also has regional associates in AIS (Thailand), Bhartir Airtel (India), Globe (Philipines), Telkomsei (Indonesia) and Airtel India also has another subsidiary Airtel Africa which operates in 15 African countries. These are all emerging economies and high growth markets as it has a large growing millennial population that drives demand for data, digital lifestyle, digital content etc. Singtel also entered into the e-Sports gaming industry, a huge billion dollar industry by the way, signing agreements with Razer to develop areas in e-payments and e-gaming.
b) Group Enterprise
Group Enterprise focuses on commercial products such as cloud, analytics, cyber security, IOT and smart city solutions. Companies under Singtel Group Enterprise include National Computer Science (NCS) and Trust wave. NCS was founded in 1981 when the Government of Singapore embarked upon initiatives to develop their IT industry in the early days. NCS develops end-to-end leading information, communication and technology (ICT) solutions in the public and private sector and operates across 20 countries. Trustwave is the largest security service provider in North America and has presence in Europe and Asia Pacific. It has 3 main areas which are threat management, vulnerability management and compliance management. More recently, just a few days ago from date of writing, Singtel has consolidated its cyber security assets and resources under the Trustwave brand and Trustwave is named to the “Leaders” quadrant in Gartner magic quadrant report 2018. Cyber security has been identified as the main growth driver in Group enterprise and Singtel is aiming to become a global leader in this space.
c) Group Digital Life
Group digital life is a smaller segment as compared to the first 2 which is identified as Singtel’s core business. Group Digital Life has a corporate venture arm called Singtel Inoov8 which invests in innovative start-ups that complements Singtel’s digital transformation. Other companies grouped under Digital Life includes Amobee, HOOQ and DataSpark. Amobee is a digital marketing company and it has operations across North America, Middle-East, Africa, Europe and Australia. HOOQ is a video-on demand streaming service that has 10,000 movies and TV shows (Netflix’s competitor). DataSpark is Singtel’s data analytics arm which Singtel can leverage on to gather insights. For example, DataSparks can analyze subscriber’s behaviors or allows for the optimization of CAPEX allocation to upgrade its network signal. I believe any company that has a data analytics team behind would gain an unfair competitive advantage compared to those that don’t. Data analytics provide fresh insights that is unknown previously. If management is able to capitalize on such insights, benefits to the company can be endless. (E.g. cost savings, targeting consumer preference, investment decisions etc.)
3. Proportion of Revenue based on Business Segment
56% of Group’s Operating Revenue
66% of EBITDA
38% of Group’s Operating Revenue
36% of EBITDA
Group Digital Life:
6% of Group’s Operating Revenue
(2%) loss of EBITDA
Group Consumer and Group Enterprise represents the main bulk of Singtel’s operating revenue, so i would not be so concern on the loss from Group Digital Life since it is not materially significant.
4. Investment in Associates
It might be interesting to note that there are reasons behind whether to own <50% and classify as investment in associates OR owning >50% and classify it as subsidiary.
In consolidation principle, subsidiary’s balance sheet items, P/L and Cash Flow are added across line by line whereas investments in associates are NOT. Investment in associates are only recorded as share of associate’s profit as a single line item in the group’s consolidated statement OR amount due from/to subsidiary in the balance sheet.
In a simplified scenario, if a company has a strong balance sheet, it makes sense to own >50% as group consolidation can enhance Singtel’s financial metrics (e.g. Net assets are increased). BUT if a company has a weak balance sheet, then it might be better to own <50% as investment in associates. The reason is because associate’s profits are directly added to Singtel’s group statement AND Singtel’s balance sheet would be prevented from being pulled down by poor figures during group consolidation. The group share of associates’ post tax-profits recorded in Singtel’s group P/L is $1.8 billion
The major concern here is Airtel (India and South Asia) which is making a loss of $31 million. Bharti Airtel in India is facing intense competition from new entrant Reliance Jio, Idea Cellular and Vodafone. There is a cut-throat pricing war going on for the past few years in India’s Telco industry in a bid to maintain market share.
Let’s see what happens when the 4th Telco (TPG Telecom) enters our local market. All Telcos (Singtel, Starhub, M1) would inevitably suffer a drop in market share to a certain extent as TPG offers attractive cheap alternative plans to gain a foot hold of market share. (Similar to how GoJek’s pricing now is much lower than Grab) So I would expect short-term volatility when TPG launches.
On the bright side, we can see that Telkomsel, AIS, Airtel and Globe all maintained number #1 Market position based on number of subscribers.
5. Singtel’s Business Diversification
Singapore only represents approximately one-third of Singtel’s group business. If TPG comes in, I would think that Singtel should be more resilient to absorb the impact as compared to Starhub or M1 which are pure local players. But being too diversified may not be a good thing entirely as you can see Investment in associates such as Bharti Airtel are facing intense competition and regulatory restrictions that are beyond the control of Singtel.
Additionally, Singtel also has forex translation gain/losses which would affect the volatility of its net income. The countries that Singtel are vested in are mainly emerging economies or exporting countries. Hence, their currency are incentivised to be weaker so as to stimulate export. But on the opposite end, Singapore has to strengthen its currency through its monetary policy to combat against inflation. This would likely lead to translation loss when foreign currency is converted back to our functional currency.
6. The 52-week low Formula Test
Filter #1 Durable Competitive advantage:
Here is an example of applying the 52-week low formula, the first filter is to evaluate if the company has a competitive advantage. Does Singtel has a competitive advantage? I would think so, definitely. M1 was founded in 1994, Starhub was founded in 1998, Singtel was founded in 1879! Way before Singapore even became independent. Singtel has that first mover advantage and it ranks 4th in the STI index by market-cap. (Starhub and M1 is not listed on STI) Apart from that, Telco industry by its nature has a very high barrier of entry, it requires extremely high capital expenditures to build the infrastructure and network, technical expertise and resources, government regulatory permits and its not a business that anyone can start-up as and when they want.
Secondly, Singtel has vast amount of resources under its belt and wide diversification business worldwide which can be leveraged on. Singapore is at the juncture of transitioning towards a smart nation with 5G and Singtel has the necessary ICT solutions from its investment that other competitors do not have, or do not have as much. Singtel plays a vital role in this area and that would drives demand from Government and business enterprises especially in the area of cyber-security.
The main risks that concerns Singtel is the performance of its investment in associates overseas especially in India and Africa as well as the impact on Telco industry when the new entrant enters the market.
Filter #2 Free Cash Flow Yield:
FCF Yield is the 2nd filter that have to be checked off as my criteria in evaluating stocks. I have created my own excel spreadsheet to calculate all the metrics that are required quite simply. Here are the results of FCF Yield. It is not significantly different from the dividend yield which is good, it means that Singtel is not playing around with accounting tricks. I prefer using FCF Yield over dividend yield because i believe evaluating a company’s cash flow is a better reflection of a firm’s true earning power as cash is harder to manipulate. Comparing across the 10-year bond yield of 2.2%, Singtel maintains a comfortable safety of margin of at least 2x. Hence, Singtel passes the 2nd filter.
Filter #3 Return on Invested Capital:
Return on Invested Capital (ROIC) is the 3rd filter to be evaluated. ROIC has to be above WACC consistently for this metric to pass. This means that management is able to efficiently utilize invested capital to generate returns above the cost of debt + cost of equity. FORTUNATELY, Singtel has computed ROIC under investor relations as shown below:
Based on my assumptions when calculating intrinsic value (as seen later), Singtel has a WACC of 5.97%. Using that figure +- 2%, Singtel still does a great job in maintaining a consistent return that far exceeds the cost of capital by at least 2x. Hence, Singtel would have passed the 3rd filter as well!
Filter #4 Long-Term Debt to FCF Ratio:
This is the 4th filter to be evaluated. Ideally, a company should take less than 5 years to pay off its long-term debts with current existing free cash flow while still maintaining its operations. It would be even better if it can do so in 3 years. (Warren Buffet’s Investment policy require 3 years) So let’s see how Singtel fare:
Looks pretty strong! For most part of the FY end, Singtel is manage to pay off its debt in less than 3 years with an exception in 2016 where it takes 3.34 years. Nevertheless, it still has an iron clad of balance sheet and we can be assured that in times of economic downturn or crisis, Singtel has higher flexibility and financial resources to navigate through. Thus, Singtel would have passed the 4th filter!
Filter #5 Prices @ 52-week low:
It’s last trade price is at $2.96 and Singtel’s is RIGHT at its 52-week low! Singtel has passed ALL the 5 Filters and it has passed the “52-week low formula”. This is a stock that is trading at its all-time low, sentiment is bad, momentum is low, this is where our human emotions (fear) are tested. Takes courage and confidence to be buying at these prices, but being contrarian always pays dividend! To gain an additional assurance, how do we know if we are buying cheap or expensive from its fair value? What is Singtel’s fair value?
7. Intrinsic value of Singtel
This is the last segment of my analysis and probably the most important one as every investor is attempting to look for that MAGIC number, the intrinsic value. I have created an intrinsic value calculator on excel spreadsheet that uses discounted cash flow valuation (DCF) to value any stocks. All that is required is to come up with the assumptions and plug in the figures. So let’s see what is Singtel’s intrinsic value?
The calculate figure turns out to be…. $3.19 rounded off = $3.20. The last trade price is $2.96 which means Singtel is already undervalued to a small extent, but value is starting to surface. However, assumptions are highly subjective and estimates projections from “analysts” are often time inaccurate. Nevertheless, it gives you a guideline of the price range of a stock that is fairly valued. Personally, i would further discount it by 20% to be conservative in case of any poor assumptions made. Hence, the price zone i would consider would be anywhere between (80% of $3.20) which is $2.56 and $2.75.