Singtel

Business

Singtel had significant operations in Singapore and Australia, through a wholly owned subsidiary of Singtel Optus. They are the second largest satellite operator in Asia pacific, with international network providing direct connections from Singapore to more than 100 countries. Singtel had major investment in telecommunications industry in Thailand, India, Philippines, Bangladesh, Indonesia and Pakistan, forming the largest multi-market mobile customer base in Asia outside of China.

This is about the first time I saw a local company earnings billions in revenue and net profit after tax – truly an eye opener.

Singtel is the leading mobile operator in Singapore in 2006 and 2007 (I’m sure they are too in the past). Besides being the market leader locally, they are also named asian mobile operator of the year in 2006 – a true testament to its market leadership status. Their red colours are splashed everywhere in the local newspaper and media; it’s hard not to recognize their branding.


Growth prospects

With number portability implemented, there is bound to be a war to win market share. It’s stated in ST that singtel will do all it can to retain its market leader position. I believe with their market clout, they can do that. Regardless of the results, their expenses is bound to rise up as I expected more advertising dollars will be spent to create a perceived difference in the services and plans by the 3 local telcos. If the price war that is bound to happen lasted for a few years (as did Hong kong when they implemented number portability), then all 3 telcos will suffer in profitability.

That being said, singtel having the most diversified operations out of the three telcos, they should be able to weather out this small bump in the local telecommunications scene.


Analysis

Singtel has growing turnover since 1996. Even during the worst sars period, their turnover increased (though their profit dropped). I suppose that is the good thing about telecommunications industry – everyone needs to use their products regardless of what happens.



CAGR over 11 yrs is 11.4%, CAGR over last 5 years is 12.6% and CAGR over last 3 years is 3.1%. I suppose their heyday of growing turnover in excess of 10% is well over, at least in the local scene. Based on just Singapore’s business segment, a turnover increment of around 1-3% seems reasonable for Singtel in the future – anymore than that, every one of us might have to hold 2-3 handphones by Singtel.

Average operating margins over 7 years is around 38%, with net margins at a very good 28.6%. ROE flunctuates, especially during the hard FY2003, but is around 17% on average. Current ratio of 1.4 on average and a total debt/equity of 0.9 – I think the figures are peculiar to the telecommunications industry with all the high initial capital cost. I need to check these set of figures with Starhub and M1.

Dividends had been increasing, except for the difficult years in 2003-2003. Payout ratio is around 45%, with the latest FY07 having a payout ratio of 50.8%.


Valuation

Again, I’m just fooling around with numbers. My usual EPS model with zero terminal value, with EPS growth ranging from 10% to 15% and discount rates ranging from 4% to 6%, gives me this table:


I do not know which values to take as an estimate for Singtel, though I know that at last closing of $3.59, it does not seem to have a margin of safety sufficient to guarantee safety of principle and an adequate return. I do not have the price range for Singtel in the troubled periods of 2001-2003. It’ll be interesting to see what the PE ratio during that time. Historically, Singtel trades at a low PE of 8.4x and a high PE of 17.9 times.

Based on last year’s EPS of $0.23 and last closing of $3.59, PE of Singtel is at 15.5x – a tad too high. Dividend yield (based on FY07’s dividend) is 3.8%. It’s too unattractive at the moment. Perhaps when the price drops way below $3, then it’ll be more attractive in terms of dividend. Again, I could be grossly underestimating the potential of Singtel given its branding, since I did not do a more in-depth study of its business model. My feeling is that a sum-of-parts valuation seems more appropriate.