Singtel has the edge to ride out headwinds

As the possibility of a new entrant into the already crowded Singapore mobile phone market comes closer to reality, it raises once again the question of how this development will affect the existing three telcos. The Infocomm Development Authority of Singapore (IDA), which announced last year that it was preparing ground for a new operator, will later this year hold an auction in which it has earmarked a generous amount of spectrum for a potential new telco. Two companies - internet service provider MyRepublic and Consistel - have announced their interest in becoming Singapore's newest mobile phone operator.

In the midst of all this, Circles Life, a mobile virtual network operator (MVNO), has leased capacity from M1 and started its own network offering mobile plans. Early indications show that it has been able to generate a fair amount of interest.

With Singapore's mobile penetration rate hovering in the 150 per cent range, any gains by new operators will likely to be at the expense of existing ones. The financial impact is of particular concern to telco investors, given that earnings over the past few quarters have been less than stellar.

For example, the S$946 million net profit for Singapore Telecommunications (Singtel) for the three months ended March 31 was just 0.8 per cent over the year-ago quarter. The quarter, which is Singtel's fourth, saw revenue slide by 5.6 per cent to S$4.09 billion. For the full year, Singtel's net profit was up 2.4 per cent at S$3.87 billion from the preceding financial year's S$3.78 billion. This came on the back of a 1.5 per cent dip in revenue to S$16.96 billion. Full year EPS (earnings per share) rose to 24.29 Singapore cents from 23.73 Singapore cents.

What is of interest is that Singtel's stock has handsomely outperformed the Straits Times Index (STI). The latter has gone down 0.5 per cent year-to-date date while the Singtel stock has gone up by nearly 13 per cent. In comparison, M1's stock is up by just 1.5 per cent and StarHub's by just 1.1 per cent.

Safe haven

It is quite clear that punters have discounted recent earnings and are looking at Singtel as a safe haven stock in the local bourse, especially in current uncertain economic climate. To be fair, the stock has always been a major local blue chip. However, it has acquired a more recent sheen thanks to smart investments made over the years which are starting to bear fruit.

As result of these investments, Singtel has dramatically reduced its dependence on the small Singapore telecom market, unlike the other two telcos. At present, more than 70 per cent of Singtel's earnings come from abroad, a figure that has been growing progressively over the years as it reaps the benefits of investments made in growth markets like India, through its stake in Bharti Airtel, Globe Telecom in the Philippines and Telkomsel in Indonesia.

A look at Singtel's financial results shows that the associates' full-year pre-tax and post-tax contributions grew by 8.2 per cent and 10 per cent respectively. The figures would have been higher had currency fluctuations been factored in. Customers in the three major markets are transitioning from pure mobile telephony to mobile internet and this will result in higher Arpu (average revenue per user).

Sitting in a small market like Singapore, it may not be always apparent just how much of a reach the company has, in terms of customers, thanks to its regional mobile associates. The figure is more than 600 million subscribers across the region, predominantly in the high growth markets. To get a sense of perspective about this number, it is pertinent to note that the world's largest mobile telephone company, China Mobile, has around 627 million subscribers. Singtel is in this enviable position thanks mainly to its 33 per cent stake in Bharti Airtel which has a 24 per cent marketshare in India. Earlier this year, India's mobile phone subscriber base crested the one billion mark, the second country after China, which itself crossed this milestone in 2012. Expert observers believe that most of these billion plus subscribers in India will now move to smartphones and the next wave in the country will be exploding data usage as the 4G networks come online. Airtel has already secured pan-Indian spectrum for its 4G services. Telkomsel has also been a standout performer for Singtel during the year with pre-tax earnings jumping 15 per cent to S$1.1 billion on the back of increased voice and data usage.

Over the past few years, Singtel has also been very shrewd in investing in a bunch of cyber security companies, the latest being Trustwave, and making alliances with others. This has already had a positive impact on its Group Enterprise business and this impact will only grow.

For the year ended March 31, Trustwave contributed S$147 million in operating revenue, S$5 million in Ebitda (earnings before interest, tax, depreciation and amortisation) and S$16 million in negative Ebit (earnings before interest and tax), including the amortisation of acquired intangibles. Singtel's Group Enterprise division's operating revenue, in constant currency terms, grew 3.9 per cent, due in part due to contribution from Trustwave.

Well ahead

Chua Sock Koong, Singtel's CEO, has noted that the company's ICT (Infocomm Technology) businesses in cloud and cyber security gave the company "that extra edge, helping us maintain our leadership in Singapore while strengthening our position in the Asia Pacific region".

The telco is well ahead of both StarHub and M1 when it comes to growing its enterprise business. As Singapore moves on to become a Smart Nation, the demand for cloud computing and cyber security services will only grow. Singtel is well positioned to take advantage.

So a combination of its enterprise business and growth prospects of its associates plus its Australia business provides Singtel with a nice cushion to ride out any headwinds that may hit the Singapore mobile market with the entrance of a new operator, which may result in price war, putting pressure on already fragile bottom lines.

This article was first published on July 06, 2016.
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