Singtel's (SGX: Z74) Trading at a Decade Low: Here's Why I'm Staying Away
I was astounded when I saw Singapore Telecommunications Limited (SGX: Z74), or Singtel for short, trading at a low not seen in many years.
At the time of writing, Singtel shares are going at S$2.22 apiece.
According to Google Finance, the last time Singtel stock traded at a price lower than the current one was back in 2008.
However, for Singtel, I think the stock market is right in pricing the telco as such.
TL;DR: Why I’m Avoiding Singtel Shares Despite It Selling at a Low Price
I’m passing on the opportunity to invest in Singtel. Here’s why:
- Singtel has a lack of revenue and net profit growth over the years
- There’s intense competition in the markets Singtel is operating in
- Likelihood of more dividend cuts in the future
- There are better investment opportunities out there compared to Singtel
Growth, Where Art Thou?
Something I look out for when investing in companies is consistent growth in revenue and net profit.
Such a trend shows that the company is growing its business and that usually translates into a share price increase over the long-term.
However, Singtel has failed to deliver on the business front.
The following table shows the telco’s revenue, net profit, net profit before one-off items (also known as “underlying net profit”) and earnings per share over the past decade (Singtel’s fiscal year ends on 31 March):
|FY2010||FY2020||Change in percentage terms|
|Total revenue (S$ million)||16,871||16,542||-2.0%|
|Net profit (S$ million)||3,907||1,075||-72.5%|
|Underlying net profit (S$ million)||3,910||2,457||-37.2%|
|Diluted earnings per share (Singapore cents)||24.46||6.56||-73.2%|
Source: Singtel annual reports
Singtel’s eroding business performance is on the back of increased competition in the industry it’s operating in.
Enter Player Number X
Telcos were popular among investors back in those days as they were seen as defensive.
They provided services such as voice, messaging, and data that no one else could. No matter what the economy went through, people would still need a telco subscription service to communicate with their loved ones.
And that gave the telcos predictable recurring revenue and cash flow.
In Singapore, there were just three main companies vying for consumer dollars — StarHub (SGX: CC3), M1, and the biggest of them all, Singtel.
However, the grip of the telcos on the consumer market was loosened when competitors started to enter the market.
Singapore’s major telcos reassured the investing public back in 2016 that the entry of a fourth telco will not be a threat to their businesses.
The thinking was that there was no business case for a new telco to enter an already-crowded market.
Singapore’s mobile population penetration rate, which represents the mobile subscriptions over the total population, was already at 154% in mid-2019.
There’s only so much more than the industry can grow.
However, with Australian telco TPG Telecom recently entering the fray, the competition just got hotter.
In Singtel’s 2020 annual general meeting, it said that mobile competition in our country has escalated significantly, even before TPG’s launch.
In the last two years, aggressive offers by both the incumbents and mobile virtual network operators (MVNOs) have “driven down mobile prices and industry profitability”.
MVNOs do not own nor operate any network infrastructure but have to lease it from either Singtel, StarHub or M1.
On top of competition from other telcos and the MVNOs in a saturated market, there are also the likes of Netflix and WhatsApp that stole the lunch from Singtel.
Netflix entered the Singapore market in January 2016.
Since then, there are other over-the-top service providers such as Amazon Prime Video (launched in December 2017) and Apple TV+ (from November 2019). When Disney+ starts its offering in Singapore, there will be more companies chasing for consumer eyeballs.
The value of broadcasted TV content by the likes of Singtel, offered over traditional networks, is no longer as valued as it once was.
This is evident from Singtel TV’s subscriber count over the years:
|FY2015||FY2016||FY2017||FY2018||FY2019||FY2020||Change in percentage terms from FY2015 to FY2020|
|Total Singtel TV customers ('000)||423||423||408||395||381||382||-9.7%|
|Pay TV operating revenue (S$ million)||236||232|| 246|| 241||230||197||-16.5%|
With the advent of WhatsApp, the usage of SMS (short message service) has also decreased, taking more money away from the telcos, including Singtel.
Singtel, along with its peers in Singapore, no longer have the grip they once had on consumers.
Elsewhere, Singtel is facing highly competitive market conditions as well. Its overseas markets provided over 65% of its FY2019/2020 underlying net profit, giving it diversification
But diversification can only do that much.
In Singtel’s 2020 annual report, it said:
“Intensified competition across markets is eroding industry profit pools. In our consumer business, competition has driven up data allowances, blunting the ability to monetise data growth. We have seen the growth of MVNOs and valueseeking consumers shift to SIM Only plans. Given the financial stress experienced by consumers and businesses in a COVID-19 world, we expect this shift to value to become more pronounced.”
That just sums up Singtel’s woes.
Shaky Dividend Outlook
Singtel has been paying stable dividends over the years, but FY2020 bucked the trend as the company cut its total dividend by 30% as compared to the previous year.
|Interim ordinary dividend (Singapore cents)||6.2||6.8||6.8||6.8||6.8||6.8||6.8||6.8||6.8||6.8||6.8|
|Final ordinary dividend (Singapore cents)||8.0||9.0||9.0||10.0||10.0||10.7||10.7||10.7||10.7||10.7||5.45|
|Special dividend (Singapore cents)||-||10.0||-||-||-||-||-||-||3.0||-||-|
|Total dividend (Singapore cents)||14.2||25.8||15.8||16.8||16.8||17.5||17.5||17.5||20.5||17.5||12.25|
Prior to FY2020, Singtel maintained its total dividend (excluding special dividend) for the past five years.
In its FY2018 annual report, Singtel noted that it “expects to maintain its ordinary dividends at 17.5 cents per share for the next two financial years and thereafter revert to the payout ratio of between 60% to 75% of its underlying net profit”.
So, the 17.5 Singapore cents per share dividend payout was expected to be maintained till FY2021.
But for FY2020, Singtel slashed its dividend payment to “conserve financial headroom to cope with uncertainties in the current COVID-19 operating environment and the capacity to invest in 5G”.
The dividend cut seemed imminent though, as I wrote for the now-defunct The Motley Fool Singapore website in June 2019 (the accompanying table should be used concurrently with the excerpt).
|Total dividend |
“From FY2014 to FY2017, Singtel maintained its dividend payout in the range of 72% to 74%. However, in FY2018, the ordinary dividend per share was above the payout ratio range of between 60% and 75% of underlying net profit, and in FY2019, the dividend payout was above 100%.
If underlying net profit were to fall or stay constant in FY2020 as compared to FY2019, the dividend payout ratio would remain above 100% at an ordinary dividend payment of 17.5 Singapore cents per share. That’s not sustainable for the long term.
To maintain the dividend payout ratio of between 60% and 75% of underlying net profit, one of two things have to happen; either 1) earnings have to rise significantly, or 2) dividends have to be cut from FY2021 onwards.
For the dividend payout ratio to come back down to 75% of underlying earnings to maintain the 17.5 Singapore cent dividend, underlying earnings per share (EPS) has to rise by around 35% in FY2021. That could be a tall order given the falling underlying EPS in the last two financial years and fierce competition in the telco space.
Assuming there’s no growth in the underlying EPS in FY2020 and FY2021 (i.e., underlying EPS at 17.3 Singapore cents), the dividend would fall to 12.98 Singapore cents per share at a 75% payout ratio.”
(For context, Singtel’s FY2020 underlying EPS fell 13.1% year-on-year to 15.1 Singapore cents and the dividend was 81% of the year’s underlying EPS.)
Surprisingly, Singtel cut its dividend way earlier, citing pressures from COVID-19 and the need to prepare for the 5th generation (5G) mobile network, which would suck up cash.
To sustain a dividend payout ratio range of between 60% and 75% of underlying net profit as stated in its FY2018 annual report, Singtel’s dividend could fall even more.
Weak Balance Sheet
On top of its falling revenue and net profit, Singtel’s balance sheet appears to be weak.
As of 31 March 2020, the telco had cash and cash equivalents of around S$1 billion, and total debt of S$14.2 billion.
Especially amid an economic downturn, I would prefer to invest in companies that have more cash than debt on their balance sheets.
With Singtel looking to invest in the 5G space, it may need to borrow more to fund the capital expenditure for the new network roll-out.
The telco already has a relatively high debt-to-equity ratio of 83%.
Granted, the 5G investment could be an important and strategic long-term investment for Singtel to create new revenue opportunities in the future.
However, I can’t predict how much that will contribute to the telco’s business and whether it would offset the fall in its main business over the long run.
At Singtel’s share price of $2.22, it has a dividend yield of 5.5%. However, the attractive yield is not sustainable in my opinion due to the business headwinds.
Assuming FY2021’s underlying EPS falls 10% year-on-year, we would arrive at a figure of 13.6 Singapore cents. Taking a conservative dividend payout ratio of 60% since cash is required for the 5G network expansion, we have an expected FY2021 dividend per share of 8.2 Singapore cents.
Using that dividend amount, the forward dividend yield would fall to 3.7% from 5.5%. Even though the 3.7% yield is not too shabby, I would prefer a higher dividend yield to commensurate for the risk taken on.
Considering all the above, I’m skipping investing in Singtel as there are better investment opportunities out there.
Would You Invest in Singtel?
Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.