Stock Review: Singtel

My friend asked me what price is a good buy for Singtel. I told him I don't know, but that I am keen to buy Singtel over its competitors M1 and Starhub because Singtel still has a monopoly in the traditional telecommunication network (fixed lines used by businesses). They also have indirect ownership of the fibre broadband network through NetLink Trust (previously known as OpenNet). Starhub and M1 will not have that long-term advantage Singtel has. That is why, financials aside, from a business standpoint, Singtel has a monopoly advantage.

Growth potential
Digging into Singtel's financial report, what stands out is that Singapore contributes to just a quarter of its EBITDA (earnings before taxes, depreciations, etc.).

Singtel's EBITA by geography

Regional mobile associates include India's Airtel, Philippine's Globe Telecom and Indonesia's Telkomsel. Australia's share comes from Optus. AIMS AMP Capital Industrial REIT (another company listed on the SGX) has a 49% stake in Optus Centre. You can consider looking at that REIT if you think that Optus Centre is a good investment.

If you think that Singapore is crowded enough, I bet the developing neighbours are just as crowded. Just based on the assumption that population will definitely grow in these developing countries, we can safely assume that the growth potential (over a very long term of 10 to 20 years) of Singtel is high. Organic population growth effects take many years to materialise.

Quality of Earnings
Singtel has an impressive investment income. What I mean is income it gets from doing nothing. Ok, they probably still have to do some work, but it is basically income derived from just shareholdings. 63% earnings come from its operations (Singapore, Australia) and 37% from its associates and joint ventures. This is akin to you having a full-time job with a gross salary of $63, say per day, and at the end of the day when you go home, you have another $37 waiting for you at home. Some people call it passive income. This diversification provides a substantial cushion for localised or seasonal dropped in earnings (e.g. Australia dollar depreciation, or drop in iPhone sales in Singapore, etc.)

Singtel's EBITA by source

Stock volatility/stability
Stock volatility or stability is important to me. I personally feel that Singtel's price spread (reaching a high of $4.40 and $3.60 low in a span of 6 months) is just an effect of the wider market swings, so I am not concerned. The Straits Times Index had a 20% price spread as well.

Singtel's stock price changes

What I am more interested in is who the price swingers are. Flipping through the financial report, we will see that the top 20 shareholders own 97% of its shares. There is also stock options granted to staff and there are activities every month. What this means is that the people who are buying and selling everyday on the SGX are likely day traders, small fries looking for long-term investments (like me), or staff who want to cash out their stock options (of course they have to pay tax on their gains too).

The daily volume has been in the range of tens of millions in the past few months, which is small, compared to the approximately 16B shares in total. 3% of that is 480M. If you see 20M shares changing hands on a day, it's only a very small portion of investors.

Singtel's Top 20 shareholders

So if you can accept that price will fluctuate because of the profile of sellers, then you should not worry about the price you pay.

Assuming a dividend of 16.8 cents (an payout has been consistent), and it's last closing price of $3.64, a yield of 4.6% is decent. The market price will likely follow the STI trends, i.e. if STI drops by another 5% from 2830 to 2690, then we can expect the price to drop from $3.64 to $3.46. Similarly, if the STI rises, then the price will rise. So the more important question is whether you are happy with the 4.6% yield based on the current price.

Singtel's dividends over the past 6 years

A buy plan that I may consider that costs ~$7,000 with eventual average price of $3.46 for 2000 units:
Buy 500 units at $3.65
if the price drops by 5%, buy 500 units at $3.46
if the price drops by 10%, buy 1000 units at $3.29
if the price goes up, just be contented that I had bought some and wait for the next opportunity.

The writer does not own any shares mentioned.

Stock Review: If I were to pick a Commercial Trust

So many candies... which to pick?

Some people buy a stock based on its price vs past 1 year, vs what they previously paid for, vs what the IPO price was, vs dividend yield, vs price-to-book ratio, etc. I have a preference for stocks that have sustainable income, and this can mean monopoly in industry, selling of goods or services that are daily necessities, companies the country cannot do without.

I had (long, long ago) divested stocks in Capital Mall Asia (2009) and Mapletree Commercial Trust (2013) shares that I got in the Initial Public Offering (IPO) after locking in capital gains of 25%, mainly because I feel that online shopping puts a strain on retail shops and it's impossible to continuously increase rents by 10%.

Commercial trust broadly includes office space, retail space and convention/exhibition space. Today my focus is on office space.

If I have only $5,000 to spend on commercial trust shares, and all the yields are attractive -- 6 to 7% -- which will you choose?

1. CapitaLand Commercial Trust (CCT)
2. Keppel REIT (K-REIT)
3. Fraser Commercial Trust (FCT)
4. OUE Commercial REIT (OUE C-REIT)
5. Mapletree Commercial Trust (MCT)
6. Suntec REIT

Comparison of key attributes among commercial trusts

Debt
CapitaLand Commercial Trust (CCT) has the least debt, which means they have more room to grow or higher profit margins, depending on how you look at it. K-REIT's debt is too high for comfort and that is possibly a reason for its suppressed stock prices, given the uncertainty of an interest rate hike.

Profit Margin
Interestingly, Suntec REIT has the lowest profit margin based on my interpretation. I re-read the financial statements a few times just to make sure that I didn't read it wrongly, and I think I lifted the correct figures. As these massive landlords also invest in different properties, I must also commend K-REIT earns a profit that is 127% its revenue. i.e. it is able to generate sizable passive income, i.e. income from its investments from subsidiaries or joint ventures whose buildings are not directly managed by the company. CCT's overall profit margin is 91%, which I like a lot.

Price-to-book ratio and yield
All look attractive. MCT is the only exception trading above book value, which reflects investor confidence, but its portfolio is 70% retail and Vivocity is doing very well.

Occupancy
CCT is particularly attractive because of high occupancy and longer average leases, which means its income stream will likely be more stable than its competitors. While at a portfolio level, FCT's lease look healthy (3+ years), when you drill into the specifics, the Singapore leases are about 1.5 years, and the Australian leases are 10 years. Income from their Australia properties form a smaller percentage, hence FCT will probably have higher operating costs trying to renew and add tenancy contracts.

Overall
CCT looks the most attractive, but there is a risk of dilution of units. The dividend of 8.5 cents assumes that none of the convertible bonds (they call it CB 2017 in their financial report) will be converted to units. The total value is $175 M at a conversion price of $1.54, representing 3.9% of total units, which will mature on 12 Sep 2017. For as long as the market price remains below $1.54, it is unlikely the investor will convert to units. The dilution effect is about -10 cents in annual dividend per share.

The writer owns some units of Keppel REIT.

To Buy or Not?

For the past one month, I had been on a mini buying spree. My friends asked me every week whether I bought anything and I was buying something every week. At the end of one month, I felt poor. I was referring to shares on the SG stock market. Money not enough. I deployed partial warchest meant for -10% correction and -20% correction all within the month of Aug 2015. The last time I deployed partial warchest for -10% correction was Dec 2014 and I had 8 months to save and top-up my warchest. No chance this time.

Theoretically, the idea was to have 100% capital control, i.e. for every $1 invested, $1 is contributed to the warchest.

When the market makes a -5% correction (benchmarked against the  highest STI reached), spend 5% of warchest, and only buy when the price drops. When the price is on the uptrend, then save money.

In the worst case scenario (based on history), when the market makes a -50% correction, spend 100% of warchest.

The rationale behind the 100% capital control is that in the event of a flash crash of -50%, I will be able to pick up stocks at half the price which will offer double protection of my invested capital in an upturn. That was the theory.

What happened between Jul and Aug was that prices dropped by 5% consecutively every one-two weeks. Following the theory, I should have spent 20% when the market was -20%, but I overspent. I spent 25%. That sucks.

So to buy or not to buy...

1. Sit out from the market for a while to top up my warchest.
2. Take a little risk and continue to buy little by little since -20% corrections are once every 4 years and we are still not near the once every 10 year crash cycle.

I think I will continue to buy, and my friends will continue to watch me buy. Nobody dares to buy and I like it that way (until I am done shopping).