Singtel Shares: What You Should Know Before Buying

Singtel is a very familiar telecom brand in Singapore. Yet Singtel shares price has been declining over the past 5 years even prior to the Covid-19 pandemic. Is it an opportunity or a business that we should avoid?

Most notably, we saw a 65% drop in net profit from S$3,095M in 2019 to $1,075M in 2020. Well, this is due to net exceptional losses of S$1.38 billion arising from Airtel’s exceptional charges for regulatory costs. If you are keen to find out more, check out the article here.

What’s important is whether the company can eventually climb back up to it’s glorious days. We will need to consider the fundamentals before considering whether to invest or not.

 

Singtel Shares Price (5 Nov 2020) Past 5 Years Snapshot

Source: Yahoo Finance, Singtel Shares Past 5 Years Snapshot (taken on 5 Nov 2020)

Business Overview

Geographical Breakdown

Do you know that the company derives more than 60% of its underlying profit from overseas operations in FY20? This is the first thing that you should be clear on. So don’t assume that it’s dominant position in Singapore’s telecommunication business will eventually prop up it’s share price.

Singtel Shares Annual Report 2020 - Geographical Breakdown

Source: Singtel Annual Report 2020

 

In fact, if we are just looking at just the Singapore Consumer segment, it’s profit share is a mere 13%. So what’s contributing to the value of Singtel shares?

*Note that the Group’s EBIT of S$3,704 in FY2020 is before deducting loss in exception items.

Singtel Shares Annual Report 2020 - Segment By Profit

Source: Singtel Annual Report 2020

Group Structure

As you can see, the Australia Consumer segment is it’s largest overseas operation so far, with an operating revenue of S$7,251M more than 3 times that of the Singapore Consumer segment. So you can say it’s more of an Australia focused company in Singapore, rather than a Singapore company.

Apart from the consumer segment in Singapore and Australia, the company derives a good chunk of it;s business from their Group Enterprise segment as well. They provide companies and governments with information and communications technology (ICT) solutions in the Asia Pacific.

The company is also branching out to the digital marketing and data analytics arena through its Group Digital Life arm, though not profitable in 2020. We see it as the Group’s investment in innovation and experimentation. Given it’s a relatively small business for now, we will not dwell into it.

Finally, we look at the Group’s Regional Associates consisting mainly of Bharti Airtel (India, South Asia, Africa), AIS (Thailand), Intouch (Thailand), Globe (Philippines) and Telkomsel (Indonesia). Singtel’s shares in the respective companies can be summed up in the snapshot below.

Source: Investor Factsheet June 2020

You can also see that the company is predominantly the market leader in each of the countries it operates. The company’s businesses are the market leaders in Thailand, Philippines, Indonesia and of course Singapore. As for India and Australia, it’s coming in a close number 2 in their respective markets.

 

Singtel Shares Strategic Analysis

As you can see, Singtel holds a number one or two positions in the markets that it operates in. It does give the group certain economies of scale.

Telecommunications companies mainly work on licenses to operate in the respective countries. For instance, in Singapore, Singtel had recently won the bids for 5G network license. The Starhub-M1 joint venture won the bids as well but not for TPG Telecom. However, TPG Telecom will be able to access these network services as well, through a “wholesale arrangement”.

Seem that the barrier to entry in this aspect of licensing isn’t that strong. Moreover, the annual report of FY2020 indicated a continued price competition as the main theme across the regions. This explains the eroding margins across the segments that the Group operates in.

Comparison of rates is common when deciding whether to sign up for a particular telecom company’s service. We think there is some but insignificant switching and search cost when jumping from one company to another. Searching and switching nowadays can be just a few clicks away or a phone call away.

In terms of enterprise solutions, it can be cyclical in nature, affected by business expansion or contraction. Although there is a case to go digital for businesses, there’s a myriad of companies competing in this segment. The businesses of offering data infrastructure, cloud computing and IT services are very competitive. We don’t see any competitive advantage that Singtel commands other than it’s mere size. Tech companies like Amazon and Google are competing fiercely in this space as well.

 

Key Financials of Singtel Shares

Return On Invested Capital

Singtel’s return on invested capital (ROIC) has been falling over the past few years. Even if we don’t account for the exceptional loss in 2020 from Airtel, ROIC would still be averaging below 10%.

It means that the allocation of capital and resources haven’t been exceptionally well, especially in the recent years.

Data Source From Singtel Group Financial Summary

 

Return On Equity

Similarly, the company’s return on equity (ROE) has been trending downward. 2018 saw a higher ROE due to exceptional gain from disposal of economic interest in NetLink Trust of S$2.03 billion.

Otherwise, the ROE will be averaging below 12%, which is not something we like as value investors. This supports our earlier analysis that the competitive advantage that the company commands is relatively weak, if any.

Data Source From Singtel Group Financial Summary

Nonetheless, the financials of the company are still healthy. Its Net Debt to EBITDA is at about 2x, though it’s getting higher in the recent two years. This means the company only need 2 years of its earnings before interest, tax, depreciation and amortization to pay off its debt.

On the operational perspective, EBITDA to net interest expense is 13.8x in 2020. However, note that it is trending downwards in the recent two years. But the company’s earnings are still very much sufficient to pay off it’s interest expense.

 

Singtel Shares Valuations

Before we look at Singtel shares price, let’s take a look at its net assets value of S$26,814M in FY2020. There’s some hidden value of its Joint Ventures that we need to adjust to its true net assets value.

It was reported the Joint Venture’s asset value at cost to be about S$11.64 billion. However, the market value is estimated to be about S$24.55 billion as of 31 March 2020. The difference is S$12.91 billion. We will need to add this to the net assets value reported.

 Source: Singtel Annual Report 2020

However, there’s about $13 billion of intangible assets reported as part of its assets in FY2020. Out of which is made up of about S$11.43 billion of Goodwill. To be conservative, we will adjust this Goodwill value to S$0. This is the accumulated premium that the Group paid above the book values of the companies it acquired till date. We will deduct this from the net assets value reported.

Therefore, overall the adjusted net assets value will still be around the reported value of S$24.55 billion. The current market capitalization is around $35.60 billion. This means that there is no substantial discount in comparison to the book value of the company.

In terms of its earnings, say we disregard the FY2020 result due to exceptional loss and Covid19 impact. And assume a net profit after tax of $3.095 billion based on FY2019. At a 8% required rate of return, we will estimate the earnings power value of Singtel to be S$38.69 billion. There is no significant margin of safety compared to the market cap now.

 

Summing Up

Since there is no observable strong competitive advantage, any growth will not be truly sustainable in the long run. The company is the market leader in the respective countries. However, such position does not give it any edge when exploring growth through expanding to other countries in the region. As such we think there is no significant margin of safety to invest in the company now.

Singtel shares is considered a pretty fair value currently. So if you are looking for a low risk and stable investment, do check it out.  The company reduced its dividends to 12.25 cents for FY2020 due to the exceptional market condition. But understand that it has been maintaining its dividends at 17.5 cents for the past few years. At the current market price of around $2.15 a share, it’s equivalent to around 8% yield. This is still a pretty stable and good returns in the long run.

Happy investing!

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