Singtel - Sinking or Swimming?

Singtel AGM 2018

I went to the Singtel AGM at suntec convention centre at 24 July 2018. As I was slightly late for the AGM and did not get good front row seats and have to rush off after the q and a , I neglected to get good photo shots of the AGM. Luckily, I have the luxury of plagiarising ready-made photos from a fellow blogger whom gave a much more concise summary of the AGM.

Missing the forest for the tree is a bad habit of mine and I shall remember to slow down and take choice photo shots to spruce up my posts. A picture says a thousand words and it will be more engaging than a price chart and chunks of text in this long post.

http://az-ra-el.blogspot.com/2018/07/tibits-i-learnt-from-singtel-agm-2018.html

Key pointers derived from the Engagement 

1) Management review
The mood of the board is one of vigilance rather than of optimism. The management / board in their discussion painted a rather realist view of the world. They are neither arrogant, complacent nor overly optimistic about their incumbent position and future growth. (I give a plus for attitude of management) They are consign ant and vigilant on the multiple threats and competitors from the multiple fronts. They are frank and open with disclosure on the multiple near time challenges they are facing.

2) Lines of business
The IOT business is still an emerging business / technology and the IOT standards are not firmed up yet. IOT is still considered to be future tech in my opinion. A lot hinges on the government will and financial support to restructure this nation to a smart nation. 

The immediate term growth story lies in industrial IOT and factory operations. Trial phases will be at one north. I have attended a mini exhibition on industrial IOT before, and I believe it mainly comprises of sensors connected to the networks of factory operations to streamline manual checks and replenishment processes. I confess this is out of my circle of competence but I can foresee less manual / on the ground process and the cost benefit will be staggering. (Imagine if it is deployed in the SAF!)

Due to potential high risk of cyber threats in traditional internet and IOT, (eg ransomware / espionage / sabotage/ recent sing health stolen sensitive medical details, physical damage through IOT linked machines ), restructuring to a digital nation will require significant cyber security investments. The trustwave acquisition and cyber monitoring centres has inbuilt synergy with the smart nation and IOT growth story. 

The retail implementation and access to IOT will be after 2020. The exciting possibilities touted by IDA are still long shots and there is too little information turned over to provide a meaningful forecast. 

5G is in the midst of being rolled out. Generally, the company is focusing on implementation and infrastructure rather than targeting visionary long shots. 

3) M&A outlook
Singtel's plan is to be a strategic investor instead of a financial investor. It will implement a buy and hold for the long run (3-10 years) if the fundamentals are good. When I sounded out the possibility of spinning off Amobee (based on analyst report) , they have confirmed there are no near term plans to do so but can be reconsidered in the future. I have yet another reason to take speculation / analyst reports with a pinch of salt. 

4) Capex and operational expenditure 

There is a large increase in Sales and general expenses as well as capex. As Singtel restructure, they are in the midst of retraining and redeploying existing personnel to the new growth areas instead of incurring additional restructuring costs. 

Regarding capex, there is generally lower capex in ict business, and higher capex in the traditional carriage business. Profit margin for both businesses is largely similar. According to management, there is no designated strategy to adjust to either end. The focus is simply on improvement of services, digitalisation to manage coats and acquire quality spectrum. 

5) Outlook of Amobee
For the future of digital marketing and data analytics (Amobee) management did not give a satisfactory answer. When I asked about the major competitors like Facebook and google, they simply indicated that the future is not crystal clear as it is unventured territory  (same as Facebook annual report). Their focus is to use the global business of Amobee Hooq and dataspark and find a market niche in the global arena. Although Singtel project a mid teen growth  (10-15%), with exciting growth due to low barriers of entry, I cannot make much out of it. 

6)  Financial performance
Other investors have raised the financial issues I have detailed in my previous blog post. Additional points to note are the cyclical one off spectrum / bandwidth costs which may affect the short term earnings of the company. 

https://caveat-emptor-venditor.blogspot.com/2018/07/singtel-annual-review-2018.html

https://caveat-emptor-venditor.blogspot.com/2018/01/blog-post.html

The dividend is most likely sustainable for the next 2-3 years according to the annual report

Banks and bond borrowing declined in 2018. There is conservative treasury policy and I/r hedging. There is strong credit rating result in lower borrowing costs. Singtel is focused on optimal debt structure but management informed Singtel conservative debt structure compared to its competitors can allow it to take more debt. With regards to intangibles and goodwill, there will be test for goodwill impairment annually. Acquisition based companies will simply have inflated intangibles. It is a feature and not a bug. 

Generally,  trust-wave will have growth in low teens and Amobee will grow in mid teens. There will be faster growth compared to the traditional telco business (probably not meaningful as market is over saturated ). Referring to the annual report, as these new businesses only encapsulate 25% of revenue, it will take a few years to reach significant scale and scope. 

For sale of telecommunications equipment, on first sight it may appear to be loss making. Management indicated the operating revenue (handset) has incorporated 'discounts' in its combo plans and its lumped up revenue is distributed to different streams of revenue (ICT etc). It is actually profitable but difficult to identify 

7) Strategy for Client retention (Branding strategy, crucial in commodity markets)

i) Invest in reliability and best network

ii) Bringing new innovations into market. Think the razor - Singtel partnership and e sports growth story
iii) Engaging clients at different touch points (physical, digital). Digitalising the front end.
Focusing on Cost Competitiveness. Researching in App based engagement to provide Personalised communication and long term relationship (relationship business)

iv) quality content provision (soccer), National Geographic,

v) bundled / packaged deals for convenience and implied discounts rather than engaging on price competition

8) War of the Telecoms (India)
Simon Israel gave a particular long monologue about the long and bloody battles in the India market (Bharti Airtel). Singtel is focused on the long term India growth story as they are rapidly digitalising. However, the telecom industry is poorly planned by the India government and hyper competitive. (similar to the power industry in Singapore) There were reckless issuing of multiple Telco licenses,  and there were bloody price wars until 15 Telcos are consolidated into the current 3.5, including the bloody and battered Bharti. With the increase in taxation / cost of acquiring spectrum, smaller players crumbled and eroded.

I can imagine the horrors,  losses / red ink  spilled by the management as they dealt with the harsh realities of the great Indian war. It will be a battle of attrition in India until the market eventually reaches equilibrium. There will be no short term improvement in India market and Singtel confirmed they will be there for the long haul. And that is not including the turf fight between IPG and Singtel in Australia! 

In preparation for World War 2 in Singapore and the potential Australian occupation (TPG)  , I hope that the veteran warriors / management in Singtel can competently build up their defences and ready their war-chest to deal with the Australian invaders, non seasoned paper generals of the virtual Telcos and the incumbents.

Prepaid plans (Take with a pinch of salt due to different cost of living)
https://www.airtel.in/

 

 

Postpaid plans
https://www.airtel.in/myplan-infinity/?icid=homepageicon

Reflections
1) IMHO,  the long term prospects of Singtel are fundamentally sound. The infrastructure, market position and capex requirement still makes Singtel's home turf in assailable. Rather, a lot of risks / prospects come from technological disruption and volatility in regional performance.

In the near time however, there is plenty to worry about. Singtel is facing structural headwinds and is trying to migrate from a traditional (crumbling) castle moat to a high tech skyscraper. Unlike prominent digital companies like Alibaba tencent whom are diwosifying into too many areas, it is still focusing on its foundations, quality of bandwidth, digital and physical infrastructure and client servicing. I believe the direction is right but there will be deteriorating financial performance. Singtel needs a greater margin of safety and what have gone low can simply go lower. 

2) Singtel is mostly facing short term financial challenges rather than long term fundamental ones and it has the free cash flow to tide through this winter.

Due to the recent recent dividend payout, there has been  large volatility in its stock price.  Considering it's prominence in the STI ETF and the extensive analyst coverage onto this stock, it takes a lot of confidence / arrogance to buy what the institutional investors are selling. There is a lot of positive retail feedback that has propped up the share price but they may be buying cheap stocks that might continue to be cheaper . I am no oracle of Omaha and I will sit this out until there is strong concrete bottom up performance and greater margin of safety. 

3) Trivia
The leaving of the retirees in troves once it is confirmed there is no buffet to be had.

Singaporeans are champion grumbler. (Yours truly is also one of them) 

Retail traders complaining they didn't receive the agm notice and picking a fight with Chua and 

Simon with "powder-ful" English instead of the SGX. 

Two shareholders arguing with management over the abolishment of the 5.35 caller ID for 'loyal ' Singtel customers. Unless they accumulate a sufficiently large position to act as an activist shareholder, I don't think they are getting anything done. 

Short term trader haggling with management about more dividend payout, and will probably dump the stock after en-cashing the dividend.