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SingTel: Treading Through Economic And Regulatory Challenges
Corporate Digest | 14 June 2013
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By: Nicholas Tan
Articles (71) Profile

Volatile. That is the appropriate word to describe SingTel’s share price in recent weeks. The telco saw its share price hit a trading year high of $4.09 on 20 May, only to mark the beginning of a downward spiral to a low of $3.63 on 6 June, or a 12.7 percent fall in a span of two weeks. In this article, we attempt to try to understand what might have triggered this volatility.

The hour has probably arrived for the Federal Reserve to ponder on tapering off its monetary stimulus policy based on the recent statements from Ben Bernanke. Following this, a refreshed uncertainty has begun encircling the global economy and a flight to a defensive high dividend payout stock like Singapore Telecommunications (SingTel) seems to be a wise choice for any investor.

However, this defensive play in recent weeks has also seen some turbulence in terms of its share price movement, primarily due to economic and company-specific news affecting it such as the depreciating Australian dollar, Myanmar telecommunication license bid and the well-publicised regulatory bust-up with the Media Development Authority (MDA).

Falling Aussie
Last month, the Reserve Bank of Australia announced to reduce the overnight cash rate target to a record low of 2.75 percent in an attempt to help industries re-balance growth away from resource investment as the Australian economy moves out of the “mining boom” period. As a result of the revision, the Aussie dollar tumbled 7 percent in the past month, making it one of the worst performing among developed market currencies.

Economists predict that the rate cuts might not end yet after the Australian economy reported its slowest annual growth pace in almost two years at 2.5 percent for 1Q13, according to the Australian Bureau of Statistics. We are of the view that these currency headwinds are likely to persist in the near term which will lead to an increase in volatility in the Aussie dollar and will continue to be a drag for SingTel’s core business. One-month implied volatility was 14 percent, based on currency options, after reaching 14.47 percent on 11 June, the highest in a year.

In its guidance report for FY14, SingTel has confirmed that its group consumer business unit, which accounts for a sizeable bulk of its revenue, is expected to decline by a low single digit percentage level mainly because of its Australia mobile service business. In which it is expected to remain subdued and continue to be impacted by the mandated reduction in mobile termination rates leading to greater competition pressure in the telecommunication market.

Myanmar Venture
According to the World Bank, Myanmar’s gross domestic product (GDP) grew 5.5 percent for FY11-12, and it has forecast GDP growth for FY12-13 to reach 6.3 percent. Currently, less than 10 percent of Myanmar’s 64 million people have access to wireless network and the government has targeted to boost telecommunication coverage to as much as 80 percent of the population by 2016. Up for contention is two licenses which will allow the telecommunication companies to build, own and operate a nationwide network for an initial term of 15 years.

SingTel, which has deep experience operating in developed and emerging markets in Asia Pacific (such as Airtel in India and AIS in Thailand to name a few), has submitted a bid along with its partners – KBZ Group and Myanmar Telephone Company. It is among 11 other bidders whom had submitted bids. Also in the running is Digicel Group, which is leading a consortium backed by George Soros’ Quantum Venture Partners and includes SGX-listed Yoma Strategic Holdings. The Myanmar government will award the two licenses on 27 June.

Also among the original bidders were China Mobile and Vodafone, two of the world’s largest mobile phone operators, however, they withdrew their bids at the last minute citing “returns would not justify the investment required”. This withdrawal does throw up some doubts as to whether the Myanmar’s growth story has been over-hyped. While we will not speculate on this, we know that if SingTel is successful in its bid, it will need to set aside a greater capital expenditure than the $2.5 billion projected for FY14. Free cash flow which is projected at a low of $2 billion for FY14 will also likely to fall further from its $3.8 billion in FY13.

BPL Cross-Carriage Issue
SingTel’s pay TV-business unit though relatively small in terms of revenue contribution, accounting for 1.2 percent of overall group revenue, has also thrown the spotlight on the telecommunication company. Its tussle with the MDA over the exclusivity issue surrounding its Barclays Premier League (BPL) broadcasting rights remains outstanding and pending appeal at now, and has taken a turn for the worst after the Ministry of Communications rejected SingTel’s request for a stay of the regulator’s order on 7 June.

As such, questions now hang over how this battle will affect its existing and prospective Mio TV subscribers as it makes arrangement for the BPL content to be shared with its rival StarHub before the start of the new season in August. While we do not expect a large exodus of customers mainly due to switching costs, fixed contracts and an affirmation statement that existing customers will not be affected by the eventual decision, we feel that Mio TV’s growth rate might slow down as customers who want to watch BPL alone will have to pay a higher monthly fee and will now have an alternative to consider.

This also raises some doubts as to the attractiveness of the BPL rights coup last year, which some analysts believe that SingTel might have paid a similar sum of $400 million which it paid for the 2010 to 2013 seasons’ rights, for the next three seasons. Empirically, this is justified as BPL television rights paid around the world has climbed in recent years due to a surge in popularity in Asia and can be seen through the 70 percent premium or £3 billion paid by British Sky Broadcasting Group for the 2013 to 2016 seasons over the preceding period.

While SingTel awaits the verdict from the authorities, we believe that its pay TV business will need to evolve from its current business strategy, which hinges on content, as the allure of holding exclusive content rights will give it less of an advantage over its rivals now.

Well trained in aspects of finance and business, Nicholas oversees the finance and manufacturing sectors at Shares Investment.

Please click here for more information about this author.

Singtel  3.170 -- --   
Business: Asia's leading communications group. [FY19 Turnover] Mobile Comm (31.1%), Data & Internet (19.2%), Infocomm Technology (17.5%), Sale of Eqmt (16.5%), Digital Biz (7.2%), Fixed Voice (5.2%), Pay-TV (2.1%), Leasing (0.8%), others (0.4%).

Insight: May-19, FY19 operating revenue remained flat at $1... Read More

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