Saturday, January 30, 2016


A quick look at Singtel.  I like them because their revenues are recurring, and they are in a markets which are a natural oligopoly.  Was attracted by their high margins - in 2015 operating margins from Singapore and Australia (after tax) were 21% - high for any industry and surprising for a utility or "dump pipe".  

The stock price has dropped recently.  Based on their earnings/cashflows, at what price would I buy?


Singtel is a holding company.  FY 2015 EBIDTA (ending March 2015) is broken down from:
  • 26% from Singapore.  Singtel is the market leader and incumbent.
  • 29% From Australia.  2nd largest operator.
  • 47% from regional associates and JVs, when broken down:
    • 9% AIS (Thailand)
    • 6% Globe (Phillipines)
    • 21% Telkomsel (Indonesia)
    • 10% Airtel (Africa, India and Bangladesh)
Overall about 2/3rd of revenue and profits are from consumers, the remaining from commercial.


Their business model is to use cashflow spun off from existing businesses to buy new businesses.  They have to balance this with paying out dividends to shareholders, and capex requirements to maintain and expand their networks.

CFO is mostly from Singapore/Australia:

CFI (outflows) are comfortably below CFO:

The largest part of CFI is buying Property, Plant and Equipment, which is quite steady over the years.  Acquisitions vary:

The dividends have been generally covered by cashflows, but this may be a problem going forward:


The main risks are:

Currency fluctuations

Page 108 of Singtel's March 2015 Annual Report gives a Sensitivity Analysis:

I'm not sure about this.  The Telkomsel number is just 10% of their profits.  And I can't make sense of the Optus number: Optus operating income was SGD 2853m in FY2015 (p2 of Appendix 1):

How can a 10% weakening of the AUD result in a less than 10% weakening of results?  Furthermore, Optus' CEO Allen Lew has been quoted saying "Our suppliers bill us in US Dollars".  The Sensitivity Analysis probably understates the impact by including the effects of currency swaps.

I'm expecting the AUD to drop another 20% vs the Sing Dollar from now (30% from the time of the 2015 results).  We are halfway through a decade long commodity decline.  By my calculations, assuming 30% of Optus' expenses are in USD, this would give in a 42% decline in Optus' SGD profit! (vs 2015 results)


Singtel's margins were stunning 10 years ago, but since then have consistently fallen to be similar with Optus:

IDA has announced intentions to allow in a 4th Mobile operator.  I believe the market is too small to support one.  The previous time this happened, Virgin Mobile closed after 9 months.

New Industries

There's a risk from Singtel moving into different industries (e.g.: cloud hosting, security) which are different from their core industry.  These industries are usually a lot more fragmented and fast moving than rolling out telecoms infrastructure.  I don't think GLCs can compete in fast-moving, unstructured industries that rely on a first-mover advantage and network effects.  These are the guys you watch Netflix view Facebook over - they can never be Netflix or Facebook.  Better to be a dumb pipe.  For example, why did they buy HungryGoWhere?


I like them because they have recurring revenue/profits, in an oligopolistic industry with some barriers to entry.   Not cyclical: their revenues/profits did not fall in 08/09.  And with Netflix and Cloud computing, the long term trend is for more and more mobile, home and office data usage.

The biggest risk is currency.  I'd wait for the AUD to drop further, or for the market to factor it in. People forget it was 20% below the SGD for several years in the 1990's and early 2000's - commodity cycles are long.  As a rough guess: factoring in a 40% decline in Optus' profits and 30% decline in Telkomsel's profits from FY15 levels, I get profit reduced by 38%, giving a share price of  $2.25 at 15X earnings or $1.80 at 12X earnings.