Saturday, 7 July 2018

Singtel- Hidden Danger And Downside Risk That May Have Been Neglected By Potential Investors

Singtel dropped to a 5 year all time record low of S$3.02 per share on 3 July 2018 (Tuesday) before rebounding to S$3.23 per share on 6 July 2018  (Friday). The plunge to the lowest point is a 16% dropped from S$3.60 at the start of this calendar year. The mind blogging part is many well known analysts over the past 2 months have predicted a targeted price of over S$3.57 to S$4.22 per share for Singtel. Hence it is certainly bewildering to see the price of Singtel flopping and wiping billions of dollars off its market capitalisation and deviation from the crystal ball prediction by so many Oracles.  
Reasons for analysts "optimistic" outlook on Singtel
Well, of course, proponents will believe that the Oracles cannot be all wrong. This must be a special case of short term and one off market overselling of the Singtel counter. No doubts Singtel will recover back to S$4 soon.  

One of the key belief in Singtel was its diversified businesses across geographical region such as Digital Life, Smart City & Security Business on top of its traditional historical business in mobile and internet subscription services. 

In addition, the 3 national outages by Telstra , Singtel-Optus's competitor, are believed to be beneficial to Optus in terms of attracting market share. 

It is also a popular belief that out of the 3 main telecom, Singtel will be the least affected by the entry of  TPG at year end due to this geographical diversification- up to 70% of revenue is from overseas.

Hidden Dangers/Downside risks that may have been neglected by many investors
It is a fallacy to believe that the entry of TPG affects only the Singapore market. TPG has also been aggressively expanding its operations in Australia. TPG had announced last year that it will be building Australia's 4th mobile network. It has spent billions in M&A deals as well as capital expenditure improving on its broadband network and also building up its Australian mobile ambition to rival Telstra and Optus. 

Singtel Group derives 50% of its revenue from Optus which is operating in Australia.  The effect of the more intense competition and the adverse effect on average pricing and market share in the Australian market will definitely lead to a decline in overall businesses in its traditional core mobile and broadband businesses. 

The entry of TPG in both Singapore and Australia markets thus erodes the revenue and profitability of its core businesses of mobile and internet which makes up more than 56% of the Group's revenue. The speed of building up the new business segments is thus crucial for the future of Singtel.

Also key is the belief that the new Digital Life business and Cyber Security (Trustwave) business will play an increasing significant role in future revenue generation for Singtel Group. I am unsure of how these businesses will unfold or behave in the event of a market downturn with global capital expenditure being delayed. Some may argue that in this information age, these will be key essential items but it remains to be seen in such drastic scenario how it will materialise. 

High level valuation of Singtel
I will do a quick and dirty projection based on some simplistic assumptions. Assuming the beginning of the year pricing already factored in investors expectation based on the previous year, the results released in May'18 for financial year ended 31 March 2018 will be the key base of further price movement due to revised market projection. We know that Singtel after normalising for the net gain of S$1.9 billion from Netlink Trust IPO, the performance so far for the previous audited financial year and Q4 had declined against the prior year and prior Q4 respectively by <8.4%> and  <17.9%>.

For the beginning calendar year of 2nd Jan 2018, Singtel pricing was at S$3.60 and I will use it as a proxy for the initial expectation before the final year and Q4 results was released. 

Taking into account the full year performance and Q4 decline, the estimated revision in price should theoretically be in a range of S$ 2.956 to S$3.298.   

Future Outlook
Prediction of value is really based on investors' outlook and a summation of all the available market information and making a judgement based on a peek into the future. 

If one takes a more pessimistic views of the possible downsides, well, it may drop below S$3 per share by year end until the new business initiatives taken up matures and proven themselves to be successful.    

If one believes the diversification story and that the overseas revenue contribution and new business segments will continue to grow, then now is the perfect time to accumulate more of Singtel at its 5 years low. I would just want to add on that investors or potential investors should also take a look the impressive resume of Singtel's key management. The Group CEO and the various divisional CEOs leading the various businesses are some of the best of the best talents in the ever dynamic Singtel Group.


  1. Not to forget, one of the foremost reasons for me to shun off Singtel is the germ called "Amobee". This plus other "sexy" tech businesses have been losing money since day one back in 2012. I think they have been given ample time but sadly, no positive earnings yet and they have been on a constant acquisition spree since then. My advice to those million dollar honchos at Singtel, your end game will be to sell these hocus pocus companies away. You are betting on the wrong horses.

  2. Yes i agree. I dont like their "anyhow acquire" spending spree. Recent spree are burning cash instead of generating cash. Dividend will be cut as CF decline. Not if but when. Just like Starhub.