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Tug-Of-Fools : SingTel – The Bear Argument
Corporate Digest | 07 February 2014
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By: Louis Kent Lee
Articles (199) Profile

In our bid to present you with a two-side argument for you to weigh the potential risks and rewards in a more objective way, Motley Fool Singapore and Shares Investment have come together to have two opposing analysts from each side to present their case.

This issue’s “face-off” looks at Singapore Telecommunications (SingTel). Motley Fool Singapore has presented their bullish case of SingTel, and now, it’s our turn to present you with our bearish case of SingTel.

The Bear Case
Yes. You probably saw the Telco giant in this heading and raised an eyebrow on the word “Bear”. It’s not surprising. After all, it’s the biggest Telco in Singapore, with an extensive geographical reach and subscriber base.

It’s not a rumour that SingTel is one of the most stable companies out there in Singapore, it’s a fact, as adequately presented in key numbers written in this separate bull argument.

But how’s the performance like for being too stable? Essentially, the share price is denoted by a myriad of factors, ranging from the company’s financial strength, earnings potential, and market confidence of market participants.

Firstly, let us take a look at the share performance of SingTel against the Straits Times Index (STI) and its peers (StarHub, M1) over the past 12 months. Looking at the chart below, one would’ve noticed that although SingTel has outperformed the STI over the past 12 months, it is actually running behind both its peers in terms of price performance. This can be largely attributed by what market participants have priced in for its peers, relative to the stability always expected for SingTel, which might be seen as a limited cap in terms of potential run ups in price performance.

Share price performance of SingTel against STI and its peers

Lowest Pitroski F-Score Among Peers
Using the latest full year results of SingTel and its peers, a comparison using the Pitroski F-score to gauge SingTel’s score among its peers was done. In a nutshell, the F-score measures the strength of a firm’s financial position, and is used as a strategy to determine the best value stocks, based upon nine accounting based stock selection criteria. The score ranges from 0-9, where the best score is 9 and the worst is 0. For a full explanation and criteria of the scoring rules, please click here.

Pitroski F-Score, tabulated using data as of 25/1/14

As you can see from the table above, SingTel’s score of 4 out of 9 lags behind that of M1 and StarHub. Two key score points that were attained by M1 but not SingTel relate to profitability measures. They are “Return on Assets has increased”, and “Gross Margin is increasing”.

Australia’s Intense Competition; Potential Dampener
A deeper look into SingTel’s revenue reveals that lower revenue contribution from its biggest geographical revenue contributor, Australia is beginning to dampen the overall performance of the group.

Revenue contributions from Australia comes from SingTel’s wholly owned subsidiary, Optus. The revenue breakdown below of SingTel over the years show just how much SingTel is dependent on the performance of Optus.

SingTel’s segmented revenue

From the segmented revenue breakdown above, one would’ve noticed that that Australian’s revenue contributions, have throughout the years, been more or less constant. And in the past three financial years, revenue growth has in fact been slow, and the decline in FY13’s revenue contribution from Australia highlights a potential material impact that could drag down SingTel’s overall performance if this persists, especially when Optus is facing intense competition in the Australian market.

Now, in case you don’t know, Optus is not as dominant in Australia as SingTel is in Singapore. Its biggest competitor, Telstra, Australia’s biggest Telco, is not making the industry landscape easy for all the other players, which includes Optus.

Tough Competition In Australia Serves As Strong Headwinds
Optus have worriedly mentioned in September last year that Telstra’s dominance and control in the mobile service market, despite the market reaching saturation point, has enabled Telstra to grow its customers numbers greatly, at a time where both Optus and Vodafone, has reported losing subscribers.

In 2013, as a result of the tough competitive landscape experienced by Optus, several retail stores have been closed in a bid to cut costs. As part of its plans to grow its customer base, Optus has changed its game plan to offer fairer prices for mobile data as data usage is expected to be a key growth driver over the next few years.

My main concern lies with the effectiveness of the game plan against the dominant giant as Telstra’s strategy on mobile broadband has already been very aggressive as a result of its superb coverage and 4G network, which already covers 85 percent of the Australian population. This competitive advantage is unlikely to be diminished that easily, and will continue to make things difficult for Telstra’s rivals.

In all, albeit SingTel’s size and dominance in Singapore, majority of its revenue still comes in from Australia, where it is facing a tough fight in the competitive arena. I would personally watch to see if SingTel could shift this contribution reliance to some other areas to buffer the shock felt to its consolidated position, else, Australia will remain my concern for SingTel.

Louis is a qualified accountant with the ACCA, and is the Research Editor at Shares Investment magazine.

Please click here for more information about this author.

Singtel  3.160 -- --   
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
StarHub  1.290 -- --   
Business: [FY18 Turnover] Mobile (34.9%), sale of equipment (22.4%), enterprise fixed (21.6%), pay TV (13.2%), broadband (7.9%).

Insight: May-19, 1Q19 total revenue rose 6% to $596.8m attr... Read More

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