Singapore Telecommunications Limited (SGX: Z74)

*This portion has nothing to do with my analysis and you can skip this paragraph if you want to*
Recently I had the time to come across some great books, surprisingly most of them aren't those which are in the line of  'how to earn money quick' or 'big bucks through stocks'. Those that really caught my attention and even got me laughing sometimes are those that teaches an individual values, mindset and the like. Say for example a man earns $2000 a month, but is comfortable living on $1500, compared to one that earns $5000 but requires an upkeep of $5000 to be satisfied, who would you consider to be wealthier? I have also gotten advice and knowledge towards reading companies (of course), from books and people. I appreciate those that have taken the time to read and provide their criticism, and as such my approach to analyzing different companies may change as I employ or remove techniques. I am always trying to improve my analysis and welcome feedback such as overlooked information, wrong data and the like. 
PS: Warren Buffett's letters to shareholders holds much more values and teachings than any book I ever came across - and they're free!

Understanding the business
While based in Singapore, Singtel actually operates many joint-ventures in various Asian countries under different names. Such as Optus (100%) in Australia, AIS (23.3%) in Thailand, Airtel (32.4%) in India, Globe (47.2% equity) in Philippines and Telkomsel (35% equity) in Indonesia.
The group also has various investments and partnerships throughout the world. More information can be found under Singtel’s annual report 2015, page 210, ‘45. COMPANIES IN THE GROUP’.
From the overview, it shows that most of Singtel’s profit does not come from Singapore, the breakdown is as given: Singapore – 26%, Australia – 29% and the rest makes up the remaining 45%. Therefore an appreciation of SGD is actually detrimental to the company and a massive loss was reported due to the depreciation of AUDSGD. However, these factors shouldn’t pose long term problems to the company as a loss due to exchange rate doesn’t represent deterioration in the company’s operation nor management.
The company’s earning is also comprised of THB, IDR, PHP, among others. Given that Singapore’s currency appreciation is showing signs of exhaustion, I would say that losses due to foreign exchange (forex) wouldn’t impact earnings a lot in the upcoming years, it could even be profitable.
The country mobile’s market shares in the various countries are as shown:

·         India (Airtel) – 23.2% (#1)

·         Indonesia (Telkomsel) – 46.0% (#1)

·         Thailand (AIS) – 45.7% (#1)

·         Philippines (Globe) – 39.8% (#1)

Rankings are based on number of mobile customers.
Of course, the moat of Singtel’s and its associates vary from country to country.  In Singapore, the company is more or less in stalemate versus Starhub and M1, with upcoming competitor Myrepublic. However, Singtel still remains the top in market share comprising of 47% of enterprise and mobile consumers. I believe Singtel will continue to grow its influence in the country although price wars between providers are inevitable. On a side note, this of course is good as having competitors allow consumers to have lower prices, not for shareholders though.
Singtel is also aggressively rolling out their free Wifi hotspots in various areas in Singapore such as shopping malls and MRT stations. This is a first in various providers and while the initial cost of infrastructure building is high, I believe these will pay off in the long run as a wider coverage will grab more consumers towards Singtel.


Financials
Technicals

 Fig. 1 – 1 year data of Z74.
From the looks of it, Singtel didn’t exactly outperform the market and with the recent drastic drop, it would seem that the company is affected worse than the straights time index (STI). A high beta value might also be observed here, possibly highlighting the fact that it is a hot stock with many institutions and investors trading it. That causes rises (or falls in this case) to be amplified compared to the market.

Fig. 2 – 5 year data of Z74
Singtel has been growing very steadily and managed to avoid the shock towards the market in 2012. However, through the years it would seem that Singtel is lagging behind the Singapore market, possibly due to their huge diversification overseas - with only 26% of their profits coming from Singapore. An investor buying the market (eg: STI ETF) would have profited more over the years compared to holding Z74.

-> All ‘year’ stated are fiscal year ending March

Revenue and net income

Year	Revenue	Expenses	Profit after tax*
2010	16,870.9	12,119.0	3,906.5
2011	18,070.6	13,081.5	3,822.7
2012	18,825.3	13,709.8	3,989.5
2013	18,183.0	13,100.0	3,510.6
2014	16,848.1	11,800.3	3,656.9
2015	17,222.9	12,283.6	3,784.5

*Does not reflect revenue – expenses as tax is excluded and the group has many individually listed misc. profits and losses, but the differences are minimal.
Nothing impressive with the revenue, it remains flat throughout the past 5 years. Even though the group operates in many countries, none of them seems to be showing a huge growth. On the bright side, the expenses aren’t increasing either. However, the group profits seem to be dipping in the recent years. 

Earnings per share, diluted

Year	Shares outstanding	EPS (cents)	Share price (dollars)
2010	15,969,714	24.46	3.09 (nov)
2011	15,949,308	23.98	3.10 (nov)
2012	15,971,940	24.97	3.22 (nov)
2013	15,975,591	21.96	3.78 (nov)
2014	15,969,773	22.87	3.90 (nov)
2015	15,977,008	23.67	3.52 (sept)

There is nothing much happening to the EPS either. The group is also not issuing large amount of shares and thus there are no problems with dilutions, although the amount of shares issues does seem to increase slightly over the years, likely due to grants towards the seniority of the company. For the past 6 years, retained earnings are S$1.4191, while share price increased by $0.43. Per dollar retained by Singtel generated approx. $0.30 share value – a rather meager amount. Given Singtel’s peak at $4.40 in April, a comparison at that time would give us a value of $.092 per dollar retained.
There was a massive plunge in Singtel’s price following July’s $4.26. Given the unimpressive financial reports the past years, a crash seemed very likely since the stock was extremely overvalued and kept rising even though there wasn’t any financial data to support the gain. With the management releasing a multitude of expansions and new services, it doesn’t seem to be bringing the company any growth, although these investments might prove their worth in the future, since most of them are infrastructure that is likely to be a one-time investment rather than inventories.

Equity, debt and ratios
We will be looking at current assets since it doesn’t make much sense to be calculating Singtel’s properties (Singtel building? Satellites? Cables?) to evaluate their financial strength.

Year	Current assets	Current (short term) liabilities	Ratio
2010	5,144.3	6,834.8	0.75266284
2011	6,555.2	8,540.8	0.76751592
2012	5,818.5	5,535.4	1.05114355
2013	4,805.8	5,791.8	0.82975931
2014	4,351.3	5,690.0	0.76472759
2015	4,767.6	5,756.8	0.82816843

Given that majority of their non-current assets are comprised of property, plant and equipment, intangible assets (patents, copyrights, trademarks etc.) and joint ventures (such as those overseas), it does not help in cushioning their current liabilities. No matter how impactful their non-current assets are, it would seem that they aren’t financially sound if debtors were to come knocking on their door in the near future. It is stated in their notes that most payables are within the 30-60 day range. With their cash on hand, it does not seem likely for them to be able to pay their current debts without liquefying some of their non-current assets or to increase borrowings.
At this point I actually want to stop digging for more information as a company in debt is an impending disaster, especially when it’s been in debt since 2010 (probably even further back). But since I am already holding onto it shares, hopefully I can find some consolation later on.
On a positive note, the group’s total assets to total liabilities in the past years are actually well in the 2-3 range. Warren Buffett doesn’t like long term assets and regard cash holdings very highly, and rightfully so. When a company doesn’t have enough cash on hand to handle debts, they are less likely able to handle economic downturns and shareholders will be the one taking the brunt. Even though they have high amount of non-current assets, the idea of Singtel selling their shops and land to pay bills are just ridiculous. This could also be the reason why Singtel exhibits high beta values for this year, explained later on.
  
Return on equity (ROE) , Return on invested capital (ROIC)

Year (FYE march)	ROE (%)	ROIC (%)
2010	17.8	18.9
2011	16.0	17.6
2012	16.7	12.0
2013	14.8	11.8
2014	15.3	11.6
2015	15.6	12.1

Although the ROIC looks decent, there is an apparent downward trend, it could be due to the new infrastructure costs that don’t show imminent returns yet, but fact is that Singtel is not generating returns with their capital that well in the recent years. Although there is a slight uptick in FY2015, one can’t really call it a recovery yet. Singtel’s ROIC is also inferior compared to its competitors, with Starhub having a ROIC of 59.46% and M1’s 25.80%. As of June 2015, Singtel’s ROIC dropped further to 7.20%. Hopefully Singtel managers aren’t losing their marbles, if this data doesn’t show improvement soon, the company’s growth might be at its limit and they will be starting to destroy capital by fruitless investments. 

Price/book value and ratios

-> Calculated as net assets / shares outstanding.

Year (FYE March)	Book	Actual	Ratio
2010	1.472	3.14	2.13315217
2011	1.527	3.00	1.96463654
2012	1.468	3.13	2.13215259
2013	1.502	3.44	2.29027963
2014	1.496	3.50	2.33957219
2015	1.550	4.39	2.83225806
If based on Sept	1.550	3.52	2.27096774

Over the years, share price have been rising much faster than its book value, as seen by the increasing price/book value. This shows that the market is over-valuating the company and when the growth isn’t as expected, prices are expected to crash – which is what happened recently. The company is still overpriced, although this might be the industry norm, looking at M1’s P/B value of 6.987 and Starhub’s 39.816.
With the recent correction that has taken place, personally I might enter if the company’s ROIC improves and the P/B ratio actually drops to 2, which translates to a share price of S$3.1, based on FY2015’s book value.

Year	EBITDA Margin (%)	Starhub’s EBITDA Margin (%)
2010	24.1	28
2011	25.1	31
2012	27.7	33
2013	28.6	33
2014	30.6	34
2015	29.6	N/A

The growth of EBITDA margin shows that the company is able to retain more earnings from its revenue and a trending increment is a good sign that past actions by the company is starting to pay off. Could this signal that the recent drop in ROIC would give us more gains in the future?

Dividends
Singtel pays out 60 – 75% of its underlying net profit as dividends. It is a relatively high amount and the group might not have enough cash on hand to cushion economic downturns and might result in a drop in dividend payout. This will cause a drop in profit to reflect largely on its share price as shareholders know that the payout will follow suit should the company’s profit drops.

Year	Dividend payout (cents)	Yield %
2010	14.2	4.52
2011	25.8* (15.8)	5.26
2012	15.8	5.04
2013	16.8	4.88
2014	16.8	4.80
2015	17.5	3.98
If based on Sept	17.5	4.97

*A special dividend of 10 cents was given, which I won’t take it into account for calculations.
While the underlying profit of Singtel, EPS, and ROIC doesn’t show improvement, the company does give increasing dividends over the years. However, when it peaked out at $4.40, investors might have realized that the company is unable to keep up its yield with respect to its growth in share price, and thus sell offs to lock in profits occurred. With the recent share price it would seem that the yield is returning to the average of ~5%.

Conclusion
Singtel doesn’t exactly show strong fundamentals, but taking into consideration that it is largely owned by Temasek holdings and has strong ties with the Singapore government, it isn’t likely to be tanking anytime soon. With the huge financial backing they should also be able to fund their costly expansions and in times of economic crisis. This doesn’t mean that there is much growth to be expected, as with current data it seems that the management is not spending their capital well. I am still expecting to buy it on further dips such as P/B ratio hitting 2, although there are better prospects out there.