Founded in 1879, Singtel is considered one of the giants in the Singapore stock market.. As a component of Singapore’s Straits Times Index, it has a market capitalization of $54 billion and is one of the more liquid stocks in the market. If there was a definition of what blue chip is, Singtel probably fits that definition. Nonetheless, it has had some issues with investors recently. The economics of the business and its competitive position has weakened somewhat. Apart from that, its investments into mobile advertising has not really panned out. What is going on with Singtel? 

As a result, Singtel’s share price had fallen over the last several years. Mr Market seems displeased with its operating performance of late. The share price of Singtel paints a gloomy view of the company as it has been on a decline since 2017.

The Numbers – Segment EBITDA

Year\SegmentGroup ConsumerGroup EnterpriseGroup Digital LifeCorporate
20153,316.6 2,061.2 (215.9) (71.2)

20163,266.3 1,958.7 (136.7)  
(75.6)
2017 3,294.9 1,913.3 (122.2) (88.3)
2018 3,369.2 1,855.9 (51.3) (84.7)
20193,166.3 1,695.2 (91.7) (77.9)

Figures in Millions

While the Group Consumer and the Group Enterprise segments have done well, what has been a drag on the company’s operating performance really is the Group Digital Life and Corporate segments of the company, generating consistently negative EBITDAs that weigh down on the entire company’s performance. And just to add to that, falling EBITDAs seem to be a noticeable trend in the Group Consumer and Group Enterprise segments. 

These are by and large effects of an ever competitive market. The incumbents Singtel, M1 and Starhub have felt the pain since 2016 as other competitors flood the market with the same mobile services at lower prices. The number of telcos right now stand at 11 inclusive of the mobile virtual network operators(MVNO). With a price war amongst all operators, margins have been decreasing and that has hurt Singtel’s operating performance.

Poor Performance of Associates & Joint Ventures

The results for FY 2019 have also been lacklustre. And Singtel’s associates are facing similar competitive pressures from its competitors. Airtel, a telco operating in India and Africa, in which Singtel has a stake in reported a pre-tax losses of $511.2 million, stemming from exceptional items. Due to that, Singtel has reported earnings per share that is lower than the prior 5 years, while maintaining the same amount of dividends paid per share. Perhaps, that is its only saving grace amongst investors for now.

Source : FY 2019 Annual Report

Dividend Matters

While the prospects of Singtel seem to be dim, not all is bad. The company has made every effort to reward investors with dividends which have been nearly unchanged for the last 6 years. It has paid an ordinary dividend per share of 17.5 cents for the last 6 years. In 2018, the company paid a special dividend of 3 cents per share. The stellar results of 2018 where the company reported earnings per share of 33.53 cents would perhaps be a rarity going forward. 2018’s results were lifted by a $2.03 billion exceptional gain through the disposal of 75.2% of NetLink Trust via an IPO.

Even then, the dividends paid out in 2019 seemed to have exceeded the earnings per share – underlying net profit which has gotten investors worried about the dividends to be paid out in the future. The group’s free cash flows in 2019 amounted to $3.65 billion while the dividends paid for the year amounted to $2.86 billion. So in a sense, the dividends are sufficiently covered by Singtel’s free cash flows. However, investors should view the capacity to raise dividends with suspicion. And rightly so. Singtel’s share price has fallen from above $4 in 2015 to $3.30 currently. 

A thought experiment perhaps. A simple one. If we were to treat the dividend stream of 17.5 cents as a perpetuity, using a discount rate of 5% to 8%, that dividend stream would be valued at between $3.50 per share to $2.20. For that reason, I tend to think that the company is fairly valued at this time.

A Slight Glimmer Of Hope In Amoebee & Group Digital Life

Simon Israel, the chairman along with Group CEO Chua Sock Koong,  have always recognised that the world is changing and that the mobile internet was becoming an increasing force to be reckoned with. In 2012, Singtel purchased a US based mobile advertising company called Amoebee. Singtel shelled out $321 million for Amoebee in a bid to stave off its impending decline. Cash and cash equivalents on the balance sheet have fallen from $1.3 billion in 2012 to $0.55 billion in its latest reported filing. Debt levels have increased considerably as well but it is still manageable. Singtel had no other choice but to deploy its cash hoard to seek out greener pastures as the world evolves. Group Digital Life and Amoebee have shown to be a slight glimmer of hope. 

While the segment is still swimming in losses, what has improved is its undeniable growth in revenues and a narrowing of losses. However, it remains to be seen as to how the performance of this reportable segment will be in the future. Certainly, there are no assurances that can be made in this regard.

Year20152016201720182019
Group Digital Life Revenues in Millions34345453910801224

Is Singtel Undervalued?

The eventual question which is topmost on the minds of investors is : Might Singtel be undervalued? This question can be answered in a satisfactory manner to me. Readers have to decide for themselves if all of these presented here makes any sense. 

Firstly, the average earnings per share based on the underlying net profit, which is before exceptional items is 22.1 cents. The current share price means the cyclically adjusted price to earnings ratio of the company based on 6 years of earnings is 14.9 times. Invert that and one gets an earnings yield of 6.7%. So the question to ask yourself is : would you be happy with a 6.7% annual return going forward? Well for me, that simply is not sufficient to justify a purchase considering that there is an immense opportunity costs involved here. All you have to do is to look around really!

CompanyEV-EBITDividend Yield %Debt-EBITDA
Singtel 26.95.22.89
China Telecom Corp Ltd6.94.041.02
Maxis Bhd20.533.842.41

As you can see from the table above, Singtel is not exactly the cheapest stock but it does pay some decent dividends. The downside is that it has more leverage than some of its competitors in the region. For the reasons presented here and perhaps much more, I do believe that Singtel on a probability scale is more fairly valued than undervalued. However, investors must decide for themselves if they want to take a more conservative view of Singtel or a more optimistic one, based on the performance of the Group Digital Life segment. As with many things, analysis often leads to more questions. But I would like to also think about it from an opportunity costs perspective. Compared to Singtel, I believe there are abundant fishing grounds to find stocks with a risk-reward ratio of $1 to $3. That means that for every dollar risked, the investment could yield $3. These are the odds that we should be aiming for as investors and that is perhaps something to think about.


kingsley

I have been an investor for 15 years now and my journey has meandered from Warren Buffett to Ben Graham. My start, like many, really was the naive idea that Buffett's skills could be replicated in some fashion. I was proven wrong when some of the supposed stock picks that I chose had dismal performances. Then, I learnt that it is no point trying to be someone I am not. Gradually, through failure and some success in deep value investing, my approach towards stocks gradually shifted to an approach based around Graham's techniques. So, I give credit where credit is due and to Ben Graham, I and many other investors around the world, owe him a great deal. So, if you want to read up on biographies, read about Ben Graham. His seminal work, Security Analysis is a gem. My books are just rich interpretations of what he has taught.

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