Singtel — Worst is over or yet to come?
By: Syazwan Sultan
Tags: Investment, Investing, Singapore, Stock Market

Here’s some flashing numbers from Singtel’s annual report for FY2020 ended March 2020.

Singtel Annual Report FY2020

It shows that all measures of earnings and profitability is coming in lower for FY2020 as compared to FY2019. Sure, FY2020 includes the first three months of 2020 where the pandemic has struck and its economic impact transcends all sectors of the economy. An argument can be made that the lower performance can be partially attributed to the white-swan event that is the pandemic.

Here is a snapshot of Singtel’s financial performance for the past 5 years.

Singtel Annual Report FY2020

Singtel Annual Report FY2020

Operating Revenue, EBITDA, EBIT and Net profit has been on steady decline for the past 5 years. In 2018, Singtel divested its share in NetLink Trust, which explains the one-off jump in its earnings. The share of associates to Group’s profits has been declining. This is especially worrying given that associates’ profits were supposed to be a cornerstone of its growth strategy. Furthermore, associates’ profits is the biggest contributor to Group’s profits (47% of EBIT in FY2020). What is even more worrying is that this decline in earnings is consistent across its core business segments, from Australia Consumer, Singapore Consumer and even to growth areas like Group Enterprise. Australia consumer contributes 24% of Group’s EBIT, followed by Enterprise at 23% and Singapore Consumer at 13%. Net profit has declined at a CAGR of 27%. Group operating revenue has declined at a CAGR of 0.62%.

Singtel’s assets has grown 12% since 2016, supported by a 20% growth in net debt and only 7% growth in equity, which is mostly from the NetLink Trust divestment. Its leverage has increased significantly. It should also be noted that more than a quarter (27%) of its assets are in goodwill, from the acquisition activities the group has carried out over the years. Goodwill is the largest line item on its balance sheet.

ROIC has almost halved from 11.7% in 2016 to 6.4% in 2020. ROE has decreased five times from 15.6% in 2016 to 3.8% in 2020. Return on total assets fell from 9.0% in 2016 to 2.1% in 2020. Basic EPS has dropped four times from 24.29 to 6.58 in 2020. These ratios have been on clear, steady decline in the past five years. Only dividend has remained steady at 17.5 per share, though even that got cut to 12.25 in FY2020 in light of the Covid-19 pandemic. In its answers to shareholders’ questions, the Group mentioned that it is exploring scrip dividends going forward. This will create more dilutive pressure on earnings that are on a seemingly inexorable downward pressure, not to mention the signal that moving to scrip dividend seem to suggest on cashflow adequacies.

This is where Singtel is trading at now.

It is trading at S$2.33 per share, an all-time low; lower than its IPO price of 2.38, lower than the 2.48 it reach during the Great Financial Crisis in 2009.

Grim reading, eh?

Stocks at all-time lows present a tidy conundrum for investors — is this an attractive entry point? This is a very tricky question. The answer is yes if one believe the fundamentals of the business are strong, earnings is likely to rebound in the future and the stock has been oversold. On the contrary, the answer will be no and investors will do well to avoid a classic value trap.

Like any telco company, Singtel business model is fairly straight forward. It provides consumers with communication services like internet, broadband, mobile data, calls and texts. It has to invest in communication infrastructure like radio assets and internet cables, which are not insubstantial capital expenditures. At the dawn on the 21st century, telcos see a prosperous future for themselves as they are at the forefront of the internet technology business. The promise of IT is like the 21st century gold rush and the telcos were well-positioned to gourge on those gold.

Then came companies that build platforms, applications and services on top of the internet connectivity that telcos provided. Apple produces the new smart phones that made Steve Jobs a billionaire. Jeff Bezos made his fortune from e-commerce technology. Social media arrived with Facebook and its other offshoots like Instagram, Twitter and Tumblr. Others like Google, Youtube, Whatsapp became household names by the end of the first decade of the 21st century. Telcos were left with continual investment in communications infrastructure to feed the insatiable demand for higher data, lower latency and better quality connectivity, all without the share of gold-rush-profits that these new platforms, applications and services were deluged with. The second decade of 21st century saw the same theme accelerating, with Netflix, Amazon, TikTok coming to town.

Telos did try to participate in creating their own platforms, applications and services. Singtel’s Hooq & Dash are recent examples of this, though they were never able to gain the traction or popularity that its competitors were able to garner, perhaps because they were pale comparisons in terms of offerings and capabilities. A telco company simply do not have the competitive advantage of a Netflix to create its own video streaming platform.

To make matters worse, telcos were getting beaten up in its own backyard. Newer telco companies with leaner business models began offering broadband or mobile data services at comparable quality with cheaper prices, less bulky packages and simpler offerings that cater to the tastes of younger generation of consumers (perhaps older ones too). Singtel probably lost significant portion of its core business to the likes of MyRepublic and Circles.Life. Even cable TV was lost to newer (albeit illegal) set-top boxes companies, if not already lost to streaming.

For Singtel, it also has to deal with the fact of a very small home market in Singapore. Back in its heyday of the early 20th century, it probably felt like the 18-year-old who is too big for home and ready to venture out into the world. That it did, indeed. Singtel expanded across Asia-Pacific and even to Africa with Airtel. It gained share in Optus in Australia, Bharti Airtel in India, Telkomsel in Indo, Globe in Philippines, among some examples. But like that 18-year-old kid, it soon realise that the world is a big scary place with lots of bigger and meaner people. Airtel had to fight a bitter war-to-the-bottom fight with Reliance Jio, financed by India’s richest man — Mukesh Ambani. Optus has to struggle in a mature and extremely competitive Australian market.

One also has to ask questions of the Management and Board. Chua Sock Koong has been CEO since 2007. She became CEO when the stock was at all-time high and oversaw the entire decline of the stock to its all-time low now. While she was instrumental in corporatising and bringing the company public, she also was responsible for this decline. Fortunately, she will retire as CEO soon, though she remain on the board.

Back to the question of whether this is a good entry point.

Fumdamentals of the industry look challenging. The group’s financial position has deteriorated over the years with higher debt, though there is further capacity to add on more debt if required. There needs to be clear evidence of better business strategy and supported by good execution for the outlook to be better for Singtel.

Firstly, it needs to get its basic offering right. Mobile data, mobile broadband, landline, cable TV, texts/calls, SIM-only plans, packages need to structured so that it is simple, compelling and attractively-priced vis-a-vis competition. Telcos like Singtel sit on a ton of consumer data that needs to be analysed to figure out what its consumer want, and then deliver it. This has to be done in its home markets and all the markets that it has expanded out to. Each market will have its own consumer preferences and competitive characteristics. It has to figure out the best product.

Second, leverage on partnerships in platforms, services and applications. Don’t try to build the next Netflix, cos you suck at it. Partner with Netflix. Telcos have done this before — remember cable TV? They partnered with productions studios and deliver content that consumers love. They did not try to create Cartoon Network or The Amazing Race. Of course, cable TV soon became obsolete with streaming. Telcos need to be nimble and adapt to what consumer wants. Otherwise, consumer will ditch it also. Telcos have the opportunity to do this with the advent of 5G technologies. Work with better players to deliver the platforms, services and applications that consumer wants.

Thirdly, leverage on its enterprise business. One of the lasting effect of the pandemic will be an added emphasis on flexible working arrangements, nimble connectivity requirements and higher connectivity security. This will drive demand for enterprise services like IoT, cloud computing/storage and cyber security. This is a solid business and Singtel has the opportunity to aggressively drive to be the market leader in this space.

Lastly, there needs to be better strategic decision making and strong execution at board and management level. There is a slew of changes with the incumbent CEO and Board Chairman stepping down to make way for new faces. Incoming Chairman, Lee Theng Kiat, looks more like an appointment by the largest shareholder (Temasek). He will still hold his current position as chairman of Temasek International. Incoming CEO, Yuen Kuan Moon, is a long-time Singtel veteran and knows the company well from his various postings around the company. Whether he can improve the company’s fortunes remain to be seen.

I recall a TV advertisement in my youthful days when telcos were the big boys in town. I think its was an advertisement by Singtel showing two boxers in a ring; one in red (Singtel) — all big and scary and one in green (Starhub) — all skinny and frail. Obviously the red boxer delivers a knock-out punch and the narrator lists out victoriously Singtel’s offerings as the red boxer basks in his glory. Nowadays, it looks more like both boxers are old, weak and can barely stand as they gasp for breath on the floor of the ring, thinking that they can still put up a fight.

We all love a comeback story. I want nothing but to see Singtel come back roaring. But until i see further evidence on strategic change in direction (not corporate gibble-gabble), I would recommend staying neutral on Singtel for now.