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SingTel (SGX: Z74) – Will this beloved blue chip ever recover?

SG, Stocks

Written by:

Zhi Rong Tan

Singtel is a blue chip stock that many Singaporeans have a love-hate relationship with.

When Singtel listed in 1993, Singaporeans were able to buy its shares at a discount. This was part of the government’s effort to encourage us to own a stake in our nation-building and also why many of our parents and grandparents are holding onto Singtel shares.

As the world evolved, Singtel appeared to struggle to pivot initially. In May 2021, Singtel announced a strategic reset in hopes of rejuvenating the business. 

Has it been effective? 

Let’s dive into their FY 2022 annual report to understand more.

A brief look at SingTel’s History

In 1955, the Singapore Telephone Board was formed as a statutory board with exclusive rights to operate as a telephone service within Singapore. After various mergers in the following years, the company became publicly listed and was renamed SingTel in 1993.

As a telecommunications conglomerate, Singtel not only has operations in Singapore but also in Australia, India, Indonesia, and the Philippines. With full ownership in Australia’s second-largest telco Optus and a 35% stake in India’s third-largest telco Airtel, we can say that Singtel has done well in its expansion.

At its peak in 2015, Singtel had a market capitalisation of S$70 billion and was Singapore’s largest public listed company. Its success was widely celebrated and had been praised by many. I even recall my teacher applauding its success back in school and how proud she was for a Singaporean brand to thrive.

Alas, who would have thought that despite its success, Singtel already had one foot in the grave. In 1997, the government decided to deregulate the telecommunications industry and terminated Singtel’s monopoly.

With more competitors springing up, it started to lose its pricing power over the year.

Of course, while Singtel has lost its lead in terms of market capitalization, it is still a beloved blue chip stock being a large company with a market capitalization of S$41.29B.

SingTel’s strategic reset

On 27 May 2021, SingTel announced a strategic reset which centers around 3 main themes:

  • leveraging its 5G leadership,
  • developing new growth engines in ICT and digital services, and
  • unlocking value of its quality infrastructure assets.

LEVERAGING 5G TO BECOME A POWERHOUSE FOR DIGITAL SOLUTIONS

With investment flowing into its 5G infrastructure, SingTel plans to leverage on it to capture 5G market share in Singapore and Australia for both the consumer and enterprise segment. This includes improving customer experience and growing its 5G enterprise and cloud solutions.

In addition, it aims to move from a ‘telecom company with digital products’ to become a ‘digital telco that can provide easy access to a wide range of digital solutions encompassing connectivity, lifestyle, and ICT’.

DEVELOPING NEW ENGINES OF GROWTH 

To propel SingTel forward, it has announced new growth opportunities for its company.

First up is the reorganisation of NCS, SingTel’s information and communications technology arm. NCS now operates as an autonomous business unit, with the objective of accelerating its expansion into the Asia Pacific.

While most of its revenue came from the public sector in Singapore, it hopes to expand its service to the enterprise sector, particularly healthcare and transport, communications, technology and media and financial services, in the markets of Singapore, Australia and Greater China.

As digitalisation continues to disrupt the industry, SingTel will step up to build its digital ecosystem with its regional associates.

This includes the adoption of GOMO by its associates and also providing lending support to obtain funding from investors.

UNLOCKING THE VALUE OF INFRASTRUCTURE ASSETS

As an asset-heavy company, SingTel has multiple infrastructure assets which include towers, satellites, subsea cables and data centres in its portfolio.

As part of the strategic review, it is exploring options to unlock the value of these infrastructures and reinvest the proceeds into other infrastructures which can provide future growth for the company. In fact, it has already begun a partial sale of its Optus’ towers in Australia via auction.

Not sure about you, but overall, I felt the recent strategic review is not a major change and seems more like a catch-up play. 

As Singtel streamlines its portfolio to focus on its new strategic plan, they are in the midst of divesting:

– Trustwave, a wholly-own subsidiary focusing on cyber-security for an estimated US$200 million to US$300 million. (It was acquired in 2015 for US$810m)

– Amobee, their digital marketing subsidiary for an estimated US$239m. (It was acquired in 2012 for US321m)

Okay, so let’s take a look at how well they have executed their strategic reset.

SingTel’s Business

Group Consumer

This is SingTel’s largest revenue segment. At S$8.37 billion for FY22, it makes up 54.6% of SingTel’s revenue.

In Singapore, this segment offers a range of services from broadband, phone plans, pay-TV to mobile payments. In this segment, we also have GOMO, SingTel’s all digital mobile product that comes with generous data allowances. The birth of GOMO can be attributed to the increased competitions from new entrants like Circles.Life which are providing much more value-for-money subscriptions.

SingTel has also diversified abroad with Optus being a wholly owned subsidiary of SingTel and also the second-largest wireless carrier in Australia. Likewise, Optus owns and operates its network infrastructure which provides services to end-users ranging from broadband, internet services to live coverage of sporting events via Optus Sport.

Both Singapore and Australia consumer segments saw a drop in revenue of 3.8% and 6.5% respectively.  

In Singapore, although mobile service and fixed broadband revenues were up by 1.3% and 4.9% each, there was a stronger reduction in mobile equipment sales, TV and fixed voice revenues. 

In Australia, Optus saw a drop in handset leasing and equipment sales due to the impact of lockdowns on retail footfall as well as being hit by the global supply shortages. 

Other regional associates in which SingTel has stakes in include Telkomsel (Indonesia), Airtel (India), Globe (Philippines) and AIS (Thailand), all of which are reputable in their countries.

Together, the revenue from these regional associates was up 24.9% from 2021.

Group Enterprise

This is the second segment of SingTel’s business and is currently contributing 24% of its total revenue.

In layman terms, SingTel’s group enterprises help businesses prepared for an increasingly digitalised world with its suite of enterprise solutions (Internet connections, mobile service plans, conferencing solution and clouds solution) and cybersecurity.

With this, SingTel clients would be able to improve its efficiency and reliability while unlocking new growth opportunities in a digitalised world.

As competition mounts, this segment saw carriage, data and internet revenue drop in 2022 while its ICT revenue managed to report a 5% growth.

NCS used to be classified under this segment, but has been reorganised into an autonomous business unit:

NCS

NCS provides digital, cloud and platform services to its clients which include governments and enterprises. 

THe shift of NCS out of the Group Enterprise saw NCS gaining more autonomy. This segment will focus on expanding its operations beyond Singapore to China and Australia. 

This move would also allow NCS to compete effectively against competitors like Accenture while still being able to tap into Singtel’s assets and resources. 

FY22 is the first year NCS would be reported as a separate segment. It saw a 3.3% growth compared to FY21 due to greater demand for digital services.

SingTel’s Financials: How are their businesses performing?

Here’s what we can tell from SingTel’s Income Statement.

Revenue continues to decline

Source: Finbox

Looking at SingTel’s revenue, we can see a consistent drop over the years. For FY2022, its revenue came in at S$15.3 billion which is a 2.7% year on year drop when compared to FY2022 revenue.

Operating income is up

Source: Finbox

After subtracting all the operating expenses (cost of goods sold, staff wages and other costs to run the business) plus depreciation, we arrive at its operating income.

FY2023 saw a jump in operating income due to a drop in operating expenses. This was mainly from administrative costs and costs of sales. This drop may not be sustainable in the coming financial year.

Decreasing Profit Margins

Source: Finbox

As SingTel faces more competition, its profit margin has been dropping.

At its peak, SingTel gross profit margin came in at 32.2%. However, this has since dropped to 23.7% in 2022. 

Net profit is up 250% to S$1.95b in FY2022 due to the gain from the sale of its stake in the Australia Tower Network. 

However, we shouldn’t rejoice yet as this 250% jump is due to an impaired net profit in FY2021 from the divestment of Amobee, while the gains in FY22 was due to the sale of the Australia Tower Network. 

Although major, both events are one-off. It would be difficult for Singtel to report similar net profit growth in FY2023. The true test would be if they can sustain the net profit in years to come.

Next, we look at SingTel’s Balance Sheet:

Debt Levels are worrying

Although total debt and total debt/total capital levels are down slightly, their debt levels are still worrying.

Source: Finbox

Debt to capital ratio gives us a general sense of SingTel’s financial structure, the interest coverage ratio* of a company would give a much complete picture of the company’s health.

*Interest coverage ratio is calculated by dividing earnings before interest and tax (EBIT) by its interest expense in a given period. 

In FY22, Singtel’s Interest coverage ratio has drop to 2.7x. It had averaged at 4.9x over the past three years. This decline is somewhat worrying as it suggests that Singtel’s earnings is slowly becoming unable to support its expenses. 

Cashflow is up

After a worrying FY21 where Singtel saw a drop of 25.2% in its cash and cash equivalents, we are back to healthier levels in FY22. Singtel reported has 2.1b in cash and cash equivalent as of March 2022.

Again, this spike was mostly due to the sale of its stake in Australia Tower Network.

As Singtel looks to focus on building 5G infrastructure, the company will need the cash to finance upcoming projects.

SingTel was announced as the winner of the 5G Call for Proposal (CFP). As the winner, SingTel would be required to provide 5G coverage to at least half of Singapore by the end of 2022 and achieve national coverage by the end of 2025.

Given that 5G infrastructure are capital intensive, we can expect SingTel to allocate more of its free cash (or acquire more debt) to build up its infrastructure in the coming years.

While in the long run, these 5G infrastructures could increase SingTel dominance, in the short term, it would continue to reduce its cash and cash equivalents. Investors may receive lower dividend as the cash are channelled to fund the infrastructures.

Singtel’s future prospects (and their restructure)

Singtel has been actively shifting its business structure in line with its strategic reset – they have closed down Hungrygowhere (which was subsequently revived by Grab), and sold subsidiaries like Trustwave and Amobee. 

All these and the sale of their stake in the Australia Tower Network have allowed Singtel to raise cash for its move into 5G.

SingTel’s Valuation – Is Singtel shares a good buy?

Price to book ratio

Being an asset-heavy company, we can look at Singtel’s Price to Book value for its valuation.

As a result of dropping share price over the years, SingTel’s PB has also come down substantially and is currently hovering at 1.5x. This can be an indication that SingTel is undervalued if we compared it to its historical average of 1.9x.

Dividend Yield

For FY22, Singtel distributed a total of 9.3 cents dividend per share, bringing its yield to about 3.7%.

Should you buy Singtel?

At its current price, SingTel is cheap and can be attractive to value investors out there, especially if they were to succeed on their 5G plans. 

Nonetheless, we do not know when its share price will recover. With so many investment opportunities out there, you will need to decide if its worthwhile to wait for Singtel to recover in the long term.

5 thoughts on “SingTel (SGX: Z74) – Will this beloved blue chip ever recover?”

    • I currently have DBS shares. However, I will not be adding more as it is near its all-time high now. When I look at banks, which are cyclical stocks, I would prefer to pick such stocks near their bottom than at the current price. Nonetheless, I have not sold my current holding as the dividend is not that bad, plus I am waiting for MAS to remove the dividend cap (which could be the next catalyst for share price appreciation)

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