An Incomplete Analysis of Singtel
Singtel is a gigantic conglomerate with business activities spanning across consumer, enterprise and digital sectors in various countries. After several years of transformation and substantial investments, it has slowly but surely morphed into a new telecommunication company that is positioned for future growth and challenges.
In recent months, the threats posed by incoming TPG (the 4th telco) and the Mobile Virtual Network Operators (MVNOs), such as Circles.Life and Zero1, have dragged down the share prices of Singtel significantly. No doubt, the increasing cut-throat competition will put pressure on their local operations, further compressing their EBITDA margin in mobile business. The possible shift among local consumers to SIM-only plan could be another sore point for Singtel as the ARPU of SIM-only plan is lower as compared to the wholesale package.
One thing is for sure, the traditional carriage revenue and profits will continue to tumble as consumers increasingly switch over to data-usage. PayTV business will also likely be stagnant or experience a slow decline as new platforms like Netflix and Amazon Prime proliferate and flood the market.
Given such a bleak outlook from the abovementioned points, one may question if Singtel still has room to survive in the coming years. However, to value Singtel based on their activities of a pure-telco play would be foolish and ignorant of their moves and investments in other sectors over the past few years.
Singtel's management has also acknowledged the challenges and headwinds that traditional business faces in their recent Singtel Investor Day 2018 event. Being realistic, they have maintained that the Consumer sector revenue will likely remain constant until FY23. Instead, the CEO had highlighted their growth in Enterprise and Digital sectors, forecasting that these two sectors' revenue will increase from current 24% of Group's revenue to about 50% in FY23. A simple calculation will tell us that Singtel's management has planned to grow the revenue by 50% in 5 years time, mainly counting on the cybersecurity, Internet of Things (Enterprise) and advertising & entertainment (Digital).
With smart cities and Internet of Things on the card, Singtel's Trustwave is poised for further growth. In Singapore alone, the plan to switch current ERP system to e-metering, the prospect of driverless cars on the roads and other smart cities solutions prove to be the bedrock for Singtel to capture and grow. All these smart cities solutions hinge on the capability to tap into a stable network for various systems to interact and facilitate the smooth transfer of data. Singtel, being a government-linked company and the most stable network locally, has an added advantage to tap into this area. Besides, the IoT requires a higher network speed from 5G network to allow devices to work. From the latest information, Singtel has already prepared to roll out 5G for commercial use in coming years. As such, when consumers start moving over from 4G to 5G, we could witness the prepared Singtel to further capture and grow its market share.
For its cybersecurity arms, it has NCS Hub which has been entrusted by the government for many years to safeguard our system. As more companies tap into Internet clouds for business operations and data analytics, cybersecurity proves to be critical to safeguard their intangible yet valuable assets. Hence, cybersecurity industry definitely has more rooms to grow moving forward.
Despite all these, cybersecurity and IoT industry is still very fragmented. Singtel CEO highlighted that the largest industry player only accounts for 6% of current market share. Hence, moving forward, it is likely that Singtel could potentially tap into their cash balance to acquire and merge with other companies to grow its share, streamlining the operation to achieve its ambitious goal of growing revenue by 50%.
Digital arms such as Amobee and HOOQ is the latest sector that Singtel tapped into. In 2013, it acquired Amobee, a digital company that is set to transform the advertising industry. After years of losses, it has reached EBITDA breakeven in the latest quarter. Management has confidence that it will be EBIT positive in one to two years. An IPO of Amobee is being discussed now, which could further unlock its value and help Singtel to realise its return and profits. All in all, Singtel has pumped in 1.2 billion so far and an IPO could value Amobee at 6.5 billion, helping Singtel to realise a net gain of 5.3 billion.
HOOQ is similar to Netflix and Amazon Prime. It is a platform that Singtel has used, in conjunction with their mobile data plan, in various countries including Philippines, India and Singapore. As this is still money losing, the management is exploring an ad funded model to support their content production cost.
In India, Bharti Airtel is exploring various ways to deleverage and strengthen its balance sheet, including the spin off of their tower infrastructure and an IPO of their African business in London. This can provide more bullets for Airtel to maintain their market share in the consolidating telco landscape in India.
After months of consolidation that witnessed various mergers, acquisition and bankruptcy, India telco industry is left with three giants (Idea/Vodafone, Airtel and Reliance Jio) that account for 98% of market share. This could allow Airtel to have a breathing space and in 12-18 months time, start to increase their pricing and improve their margins.
In Indonesia, Telkomsel is likely to increase their pricing plan again as the industry players have realised the lower pricing will only hurt each other. As such, the pricing pressure is expected to wean off. For their Thailand and Philippines business, it is expected to continue maintaining their leading market share and profitability. Thailand could prove to be more exciting as AIS had plan to increase their fixed broadband market share from current 7% to 22%, paving way for potential growth.
In addition, Singtel has a goal to create a common e-wallet payment app with its regional associates and monetise it in the long run. With a relatively low credit card penetration rate and limited banking access in these countries, e-wallet could be another alternative for the consumers in these countries to be cash-free. The synergies derived from the collaboration could help Singtel to achieve cost-cutting and share technological know-how.
Lastly, Singtel has pledged to improve its efficiency via its digitalisation push to achieve cost reduction of 500 million per year. These moves include the utilisation of a common mobile app for payment/queries purpose to save on customer service cost while remaining customer-centric through the apps. Headcount in Optus Australia is expected to reduce by 600 through streamlining of its operation between Optus and Virgin Mobile.
With all these positives in the next 5 years, together with the management's pledge to maintain 17.5 cents dividends in the next two years, Singtel is a long-term telco cum tech play that will continue to pay a meaningful dividend while waiting for fruits to bear.