Stock Review: Singtel

Few years back, when Singtel prices were low, I wrote a review for Singtel in Sep 2015. I usually don't read every company's quarterly or financial report. It's a lot to read if I have to read 20 reports every quarter because I have about 20 different stocks. I usually only read up on companies which are on my shopping list and their prices are at 52-week lows, or below the past 5-years mean.

I reference Singtel's latest 3Q2018 report, i.e. 9 months ended 31 Dec 2017.

A recap of Singtel's business is that it has 3 lines of business -- Consumer (Telco), Enterprise (NCS, IT services), Digital Life and Corporate (which I will call it the rest, including rental income, start-ups, venture capital endevours), which contributes 77%, 23%, 0% profit before tax and depreciation (i.e. EBITDA on Page 31) respectively.

In the financial report, we aren't able to get a clear breakdown of telco EBITDA by geography because the report is grouped at a high-level as 100% owned and non-100% owned. Singtel and Optus are 100% owned, so the number is reported together. For the remaining telcos, they are like investments made by Singtel and the financial report itemised them and also allow you to calculate the Return on Asset for these investments. The profit (i.e. EBITDA minus depreciation, tax) by geography is available in the 2017 Annual Report (AR2017 data is 9 months old).

Data extracted from 3Q2018 Page 31

Although Airtel is not giving a good return, returns from Indonesia, Philippines and Thailand are good.

Screen shot from AR2017 Page 2

Income stream remains well-diversified with 70% of income sourced outside of Singapore. What could have caused Singtel prices to fall (and continue to fall) are possibly the reduced income from Airtel because Airtel is facing regulatory demands to the tune of S$3.75B (Page 28). To me, the worst case scenario is no dividends from Airtel, let's assume S$276M/year less profits. AIS (Thailand) is also facing regulatory demands of S$1.11B. Let's say we assume the worst case scenario of no dividends from AIS, then S$337M/year less profits. In 2017, net profit was $3.853B (AR2017 Page 6). If we assume worst case scenarios of 0 income from Airtel and AIS, S$3.24B and 16,344,561,000 number of shares (2Q2018 Page 20) translates to Earnings Per Share (EPS) of 23.96 cents (AR2017 Page 110) to 19.8 cents. This should not have any impact on Singtel's ability to pay 17.5 cents of dividends.

In terms of competition from the 4th, 5th, 6th Telco in Singapore, I don't think there will be much impact as these telcos will still need to rent the lines/bandwidth from Netlink Trust or existing telcos Singtel/M1/Starhub. These new players will also keep Singtel on its toes to keep cost low and retain their customers, which a definitely a good thing. The least we want is complacent monopoly giants.

In 3Q2018 Management Analysis Report, we can read some management comments. Usually management statements such as these are made together with the financial statements. Singtel separated it as a separate document probably because they furnish a lot more information than other companies would, which I like. I like their transparency, and it shows that they are also facing competition head on.

The report explained that the decrease in profit is mainly due to reduced profits from Airtel and reduced income from Netlink Trust as a result of selling Netlink Trust when compared on a year to year basis. Reduced income from Netlink Trust is expected to be seen in every quarterly report from Jul 2017, we will see this quarter-on-quarter reduction in another 2 more quarterly reports. I am personally not concerned with this because Singtel profited from the sale of Netlink Trust and lowered their debts as a result.

Debt was reduced from S$9,354M (D/E = 23.8%) to S$8,551M (22.5%). Debt/Equity (D/E) ratio is a measure of how much debt the company has as a percentage of shareholder value and retained earnings. ~20% is a good number. Singtel probably used the Netlink Trust sale proceeds to lower their debt, which is a good thing.

Singapore mobile revenue is 19% of overall revenue (Page 8). If there are worries about the competition in Singapore, M1 and Starhub are the ones who will face stiffer competition than Singtel because Singtel is the elephant in the room with 48.9% prepaid and postpaid market share (Page 53). In terms of debt, Singtel's debt is a lot lower than M1 and Starhub's. I have more details on the debt comparison in Stock Review: M1.

As at 31 December 2017, NCS’ order book increased by 25% to S$2.9 billion from a year ago (Page 33). There is no further elaboration of this, but these increases in revenue should be recognised in the next few years, and won't be immediate as IT projects typically have 1-2 years of implementation time.

Assuming a 17.5 cents dividend, at Singtel's last closing price of $3.33, it translates to a 5.25%. This is a very good yield for Singtel, considering how big an economic moat it has, diversed income streams, and stable dividend yield track record.

Major shareholder - Temasek - I bet they won't sell their stake in Singtel. It's anyone's guess how much lower prices will go. The previous low was $3.10 in 2011 but circumstances are very different now. It was $4.40 a year ago and how different were circumstances? The price has a history to have cycles and as long as we buy at the lower ends, we will have a higher margin of safety (to go wrong and make a loss). If you have extra cash, you can buy more and sell some away when the prices go up. For me, I am happy with a 5% yield.

Screen shot from AR2017 Page 230

The writers owns Singtel shares.

What did I buy in Feb 18?

Singtel I can't stress enough how good a deal Singtel is now. $3.35 screams lelong lelong and I don't know why there is so much selling. I bought more at $3.50 and $3.35. My next entry price will probably be around $3.20 if prices continues to fall. Anything below $3.50 (i.e. 5% yield) is a really good deal. 17.5 cents/year of dividends is definitely sustainable. I will say $3.80 would have been a fair price as its historical yield is closer to 4% than 5%. $3.60 would have provided sufficient margin of safety.

Wilmar I bought 1 lot only at $3.00 after much deliberation. It's a fair price, but I don't feel that I have sufficient margin of safety. I will see how it goes.

I am not sure if I will buy more in Feb, but I will monitor the situation as I had spent quite a bit these 2 months. I am also feeling slightly cash poor because I channelled $40k into Singapore Savings Bonds last month, and we aren't exactly in a market crash situation, so I won't be dipping too much into the warchest.