I’ve found myself struggling to answer this — “Is Singtel such a lousy stock?” When a friend asked me two weeks ago.
I wrote my thoughts down.
Nowadays, we hear the media talking about 5G, or fifth-generation wireless technology.
5G is the stuff that promises huge surfing speed 20 times faster than our current 4G networks.
This will help boost the connection between devices in self-driving cars, “internet of things”, the future of artificial intelligence, and our smart phone apps.
It’s the very same stuff that Singtel (SGX:Z74) has won the license to sell.
And Singtel has to roll out the 5G network across half the island by the end of 2022. Full coverage by the end of 2025.
Normally, when Singtel bags a big license like this, you know there’s a huge growth opportunity.
You’d expect to see soaring revenues. You’d expect to see rising profits and more importantly, collect growing dividends.
But that’s not the case here.
The ugly truth about Singtel
You see, spectrum auctions impose a huge cost on Singtel — 5G requires a lot more infrastructure investments than its legacy 3G and 4G networks.
Spectrum auction is how governments allocate rights to sell data signals to telco providers. In this case, Singtel is one of the two winners who can sell 5G data signals here.
And the result is an obsessive drive to charge consumers and companies higher.
But the thing is, at the same time, Singtel faces an economic challenge.
That it’s not possible to raise 5G data prices indefinitely. In other words, Singtel is a price-taker.
Think about it, even when 5G comes, what’s stopping you from switching to another cheaper telco? Nothing.
Over time, intense competition will simply force Singtel to lower their data plan prices. We see this happening with previous 3G, 4G rollouts.
Data gets cheaper over time.
For me, Singtel is essentially a “commodity” business.
To be fair, of course, not all commodity businesses are bad. Diligence subscribers can access my latest >> Special Report: How I’ll Own the Best Assets Selling a ‘Commodity’ Product
And this intense competition is the chief threat Singtel is facing.
You see, like dealing with Singapore’s low fertility rate, our government is not stopping at three.
In 2016, TPG Telecom, an Australian telco operator became the fourth telecom operator here. Then, came along with Circles.Life and MyRepublic.
The entire telco landcape was wrecked the moment new players came in — competing in a small domestic market (I admit, this was something I sorely missed out).
No matter how great your services are, the telco business is dead simple.
The government controls the number of telco licenses. So you know how many players can be in the industry — you predict how much data plan you sell, how much you charge to customers and how many plans you can sell.
Then factor in costs, including licensing fees.
You see, Singapore is just a tiny 5.7 million people island city. This is so much different than the U.S., China and Japan, where populations are much bigger.
Unlike other telcos elsewhere, Singtel has to fight it out with many players for a ridiculously small market.
Singtel by the numbers
In its latest third quarter financial results, Singtel’s total revenues fell 5.9% to S$4.2 billion, while operating profits sunk 39% to S$328 million. Both Australia and Singapore segments were down 8% and 11% respectively.
All due to intense competition in Singtel’s roaming and prepaid mobile businesses.
What made Singtel’s business worse was the massive write-down of S$2 billion from its India associate — Bharti Airtel. This major Indian telco was hit with a huge levy by the Indian government on spectrum charges.
Because of this, in its financial year ending March 2020, Singtel’s net profits fell a shocking 65% to S$1 billion.
Singtel used to be a dividend darling. Since 2010, Singtel grew its dividends from 14.2 cents to 17.5 cents in 2019. But, for its full financial year March 2020, it lowered dividends to 12.25 cents per share because of its Indian subsidiary write-off.
Now, Singtel is expecting to pay a paltry dividend of 5.1 cents per share for its full year March 2021 results. Singtel shares work out to be around 2% dividend yield today.
Its dividends are cut, shares have fallen 45% since 2015. It’s going to take more than just 5G to pull this telco giant back on track.
Zombie companies are dead fish in the waters
They say “commodity” businesses are like dead fish in the waters.
But I think Singtel is far from being in financial trouble. Singtel simply can’t grope in the dark and buy loss-making acquisitions. It’s going to cost more than what their company is worth. This is what has filled the investing graveyard.
In my opinion, what this company needs is to rethink its overseas strategy.
Because that’s where I expect its future growth.
If not, I’d imagine spiraling losses and grow debt levels if things don’t change.
Diligence Members can access >> my Special Report: Ten Doomed Singapore Companies I’m Avoiding Stock Guide 2021 (Singtel is one of them).
Sometimes, investing can be simple.
Always here for you,
Willie Keng, CFA
Founder, Dividend Titan
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