Singapore Telecommunications Limited (“Singtel”) is a Singaporean multinational telecommunications conglomerate and one of the four major telcos operating in the country.
Headquartered in Singapore, Singtel has 140 years of operating experience and played a pivotal role in the country’s development as a major communications hub.
Optus Administration Pty Limited is their main subsidiary in Australia, and is a leader in integrated telecommunications, constantly raising the bar in innovative products and services.
They are also strategically invested in leading companies in Asia and Africa, including Bharti Airtel (India, South Asia and Africa), Telkomsel (Indonesia), Globe Telecom (the Philippines) and Advanced Info Service (Thailand).
Revenue Stream
For the financial year ended 31 March 2020, about 46% (2019: 48%) of their operating revenue comes from mobile services. This is kind of expected from a telecommunications company. These services prices tend to be generally suppressed downwards in order to target the general consumer markets. So in order to grow, Singtel needs to increase their volume of sales.
As disclosed in the Annual Report 2020, the Group’s revenue is mainly derived from Singapore and Australia which respectively accounted for approximately 39% (2019: 38%) and 51% (2019: 52%) of the total revenue for the financial year ended 31 March 2020. Singapore and Australia are already saturated markets. In order to succeed in increasing the volume, that is why Singtel venture into other geographic locations such as India. This is not without challenges. However risks need to be taken in order to reap rewards.
5G
There was much enthusiasm about the upcoming 5G plans in Singapore. I believe it is quite warranted. With Singtel winning one of the 2 licence, the rest of the companies, such as TPG Telecom, would only be able to roll out localised 5G networks. This sets up a high barrier to entry for new entrants.
Singtel can then monopolize and enter into wholesale arrangements for the use of 5G networks with TPG and mobile virtual network operators, which can in turn offer retail 5G services to end users. This is turn is an added revenue steam for the company.
Keep in mind though that the expected full roll-out is 2025. In the meantime, other countries are already discussing about the potential 6G network.
Dividend
Singtel was once viewed as a stable retirement dividend stock (probably still is at the moment). However, due to the poor economic outlook, Singtel’s board (“Board”) has proposed a final ordinary dividend of 5.45 cents per share, almost half the 10.7 cents per share a year ago. This will bring the total dividend per share for the year to 12.25 cents, from 17.5 cents a year earlier.
At the current share price on 26 July 2020 of $2.48, this translates to a dividend yield of 4.9% as compared to a yield of 7% if a dividend of 17.5 cents was paid out.
Website: Singtel Q4 profit falls 25.7% to $574m; dividend nearly halved to 5.45 cents
This dividend level is the same as in 2008 during the Global Financial Crisis. In my view, this means the Board is of the opinion that there will be more headwinds and cash flow issues equivalent to the 2008 recession. Thus they need to put aside cash for a rainy day.
While a dividend yield of 4.9% is still attractive, it remains to be seen if it can be sustained. Especially since the impact of Covid-19 is still in developing stages.
Key things to note
Amazon buying the associate
Amazon has announced their plans to acquire a roughly 5 per cent stake based on the current market value of Bharti Airtel (“Bharti”), which is India’s third-largest telecoms company with more than 300 million subscribers. Bharti is also an associate of Singtel, in which was invested into by Singtel to tap into the market of India.
Many investors in the market take this as a good sign for Singtel, mentioning that this means Singtel’s investment is undervalued and a strong backer will help to boost Bharti’s presence in the market.
Website: Amazon in talks to buy US$2 billion stake in Bharti Airtel
This in my opinion is overly optimistic. It will only be true if Amazon is the only big player that enters in the market. However this is not the case. We also see companies like Google and Facebook looking to venture into this untapped market.
To me, it means Singtel actually lost out. After investing into Bharti over such a long period of time, they might end up with smaller share of profits moving forward due to dilution or even potential losses as competition becomes even more keen. They will be unable to reap a substantial benefit from this investment.
Upcoming capital expenditures
Singtel being awarded the 5G licence would mean that they will have to incur significant capital expenditures in order to set up the infrastructure.
While neither Singtel nor the StarHub-M1 joint venture, which also bagged a 5G licence, have released a projection of the capital expenditure needed, a DBS analyst earlier estimated that each 5G network could require up to $1.5 billion in investments over six to seven years.
As at 31 March 2020, Singtel only has $1 billion cash and cash equivalent available, and yet have total borrowings of $14 billion (current and non-current). I am expecting some form of external fund raising in the future, whether through rights issues or additional borrowings. I would prefer the latter considering the low interest rates in our current environment but will not rule out the possibility of a rights issue within the next few years.
Website: Singtel says its 5G strategy involves building new services, not just network access
Below is a snap shot of their statement of financial position as at 31 March 2020.
Conclusion
Not vested in Singtel as there are many other opportunities out there. I will however put it on my watchlist and wait for further clarity on the impact of the entries by the tech giants.
In the current climate, a more preferred entry price for me would be between $2.00 to $2.10 per share. This will also be re-evaluated in the event if Singtel decides to rights issue to fund the capital expenditure for the 5G network. I am expecting a further dividend cut to 10 cents annually and maintaining a yield of around 5% at $2.00 per share.
In my opinion, it is better not to take the risk and instead earn a smaller reward in the future.
