SingTel at S$2.96 – 3 quick thoughts on why I’m still not a buyer

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In my previous article on SingTel, I ended off by saying that I would consider buying SingTel at a 6% dividend yield, which works out to about S$2.91. SingTel was trading at S$3.33 back then. Today, it closed at S$2.96, which is an awful lot closer to the magical 6% yield I had set for myself.

I also chanced across this article shared by another blogger that puts forth quite a bullish case on SingTel.

All that got me thinking, with SingTel at S$2.96, if it were to drop a little more and start trading at a 6% yield, would I be tempted?

In my previous article, I highlighted 3 main risks with a SingTel investment: (1) Forex movement for emerging markets (2) Poor industry outlook and dynamics, (3) Competitive Singapore business.

Let’s take a quick look at what’s changed since then.

1. Forex Movement for Emerging Markets (EM)

This risk goes like this. SingTel holds large equity stakes in telco players in Indonesia, Phillipines, Thailand, and India. In fact, a huge portion of SingTel’s revenues are denominated in a foreign currency. With a hawkish Federal Reserve and strong US dollar, these EM currencies will come under significant pressure. A large depreciation of the local currency against the SGD will negatively impact SingTel’s earnings. It’s quite clear this risk came into play in 2018, as can be seen from SingTel’s latest earnings.

But all that’s in the past. As an investor, the only thing I’m looking at is the future, so the question here is what will EM Forex movements look like in 2019? And that’s a tricky one, because it looks a lot like the US rate hikes have caused significant stress for global financial markets, so there’s a good chance that Powell’s Federal Reserve turns more dovish in 2019. That should translate into a comparatively better year for EM Forex in 2019, which was one of the predictions I made in my Investment Predictions for 2019.

However, while I expect 2019 to be a better year than 2018, I still think it will be a bad year for EM Forex overall. Even if there are only 2 rate hikes, it’s still a lot of pressure for these EM economies, and I just don’t see investors rushing to load up on EM risk assets just yet.

Verdict: EM Forex to be less of a concern for Singtel in 2019, but it will continue to be a headwind.

2. Poor Industry Outlook and Dynamics

This argument goes like this. SingTel is primarily a telco operator. They make money through consumers’ monthly phone lines. Industry trends globally have indicated that consumers are generally moving towards SIM only plans, as opposed to the traditional 24 month plans that comes with a phone. This is bad news because SIM only plans are a lower margin business, translating into lower profits.

None of this has changed. If anything, recent numbers from the industry has actually confirmed this trend.  More and more consumers have come to realise that it is cheaper to buy a phone themselves, and get a SIM only plan. I recall a research report (can’t locate the link unfortunately) which stated that the SIM only rate in Singapore is below 10%, while the rates in other developed economies are closer to 25%. That’s a lot of room to go if such reports are to be believed.

In the longer term, I continue to be worried about the long term outlook for the telco business. What is the value add of Singtel, M1 or Starhub these days? They’re a necessity to connect to the internet, but it makes absolutely no difference which one I go with. A lot of the money to be made lies further up the value chain, in the Googles, the Facebooks, the Netflixes. Unless telcos find a way to add value, they’re just going to be stuck providing commoditised services. It’s not necessarily a bad thing, but when you’re providing a commoditised service in a market where you have multiple competitors, you have no monopoly, and no pricing power, and that’s a really scary business for any investor to invest in.

Verdict: The short term and long term dynamics of the industry continue to trouble me.

3. Competitive Singapore Business

This last one goes like this. With TPG Telco coming in, and with TPG Telco having cheaper access to the airwaves, they’re able to price at a lower rate. This creates a price war in the local telco business, destroying margins for all existing players.

Surprisingly, this was the risk that didn’t come to fruition. TPG Telco has delayed their entry into Singapore to about Q2 2019 (was originally scheduled for Q4 2018), which has translated into positive earnings results for SingTel’s Singapore business.

However, I do expect TPG Telco to enter the Singapore market eventually, and the aggressiveness of their pricing plans will be key. If TPG Telco prices plans way below existing rates, it could be a bruising battle for all existing players.

Verdict: Temporary reprieve for now, but the risk will inevitably return in 2019.

Closing Thoughts

The more I think about it, the more I realise that I just don’t like SingTel as an investment because of the second risk. The industry that SingTel is operating in is frankly just horrible. There’s no monopoly, there’s no pricing power, and there’s almost no way to differentiate the product or value add. Sure, they have enterprise services where they provide specialised services to companies, and they have Digital Life where they’re trying out new products such as e-gaming, cybersecurity, mobile payments etc. But more than 50% of their revenue still comes from the traditional consumer phone business, and if that core business suffers, it’s going to take a lot of cybersecurity deals to make up for the loss in income.

Coincidentally, Softbank Mobile (a Japanese telco) just IPOed today, and this blockbuster IPO tanked 15% on day one trading. Okay, some of that could be due to market sentiment and Softbank overpricing the stock, but news like these just leave me incredibly bearish on the telco industry as a whole.

With the recent correction in share prices, a lot of counters are looking very attractive now. For example, Netlink Trust is trading at about 6% yield these days, and that’s a company that’s in a true monopoly. With opportunities such as these lying around, I don’t see a need to take a risk on SingTel, especially when the outlook around its core business looks so murky.

It’s definitely worth keeping an eye on SingTel because if the market overreacts in 2019, we could well see this stock trade even lower. In such a situation, it may be worth buying a little just to trade the rebound. But as a longer term investment, I’ve come to realise that SingTel is not for me. So unfortunately, even if this does touch the magical 6% yield, I’ll be giving it a miss.

Till next time, Financial Horse, signing out!


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