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SingTel’s Increasing Dependence on International Profit

Singtel1 Telecommunications operator SingTel (SGX: Z74) is Singapore’s largest company by market capitalisation with a value just south of S$63b.

Judging from its market value and profits for the last 12 months of S$3.51b, the company must have done something very right in the past.

But, did you know that SingTel’s profits have actually been declining from March 2004 to March 2013 (SingTel has a financial year that ends on March) even as its top-line has grown by more than 50%?

The chart below, which plots the company’s profit before interest and taxes alongside its revenue, makes the situation clearer.

Ser Jing - SingTel's Increasing Dependence on International Profit (Graph 1)

Source: SingTel’s Annual Reports

What could have contributed to SingTel’s slipping profits? Despite being nearly ubiquitous to residents in Singapore due to the wide reach of its internet, mobile and pay-TV services, the company actually derives a large chunk of its profits from overseas.

As early as the financial year ended March 2004, almost a third of SingTel’s EBITDA was contributed by its Australian subsidiary, Optus.

Perhaps, looking at the geographical distribution of its profit-sources could help us glean some answers about the profit-decline and for that, we can turn to the chart below.

Ser Jing - SingTel's Increasing Dependence on International Profit (Graph 2)

Source: SingTel’s Annual Reports

Turns out, the profit before interest and taxes coming from Singapore has been slipping alarmingly. If not for Optus’s strong showing over the years, SingTel’s overall corporate performance would have gone down the hill.

The declining performance of the Singapore-arm of SingTel’s business would likely have stemmed from the emergence of smaller local telco competitors Starhub (SGX: CC3) and M1 Limited (SGX: B2F) in 2000 and 1995 respectively.

Both Starhub and M1 operate predominantly in Singapore and compete with each other, alongside SingTel, for customers’ dollars for internet, mobile and pay-TV services.

Curiously, Starhub and M1 have done much better here as compared to SingTel, despite being smaller in scale. Starhub’s earnings have grown from a loss of $52m in 2004 to a profit of S$359m for last year, while M1’s earnings declined very slightly from S$154.6m to S$146.5m in the same period.

The better corporate performance from Starhub and M1 has probably led them both to have better stock market returns from Nov 2004 till now when compared to SingTel as shown in the chart below.

Ser Jing - SingTel's Increasing Dependence on International Profit (Graph 3)

Source: Yahoo Finance

In any case, despite the keen competition, SingTel’s not letting things go down without a fight. In the company’s latest annual report, CEO Chua Sock Koong reiterated SingTel’s stance in transforming itself into a provider of value-added data services for its customers around the world – including Singapore – and not just be “providers of “dump pipes” or network connection, which is a low value-add and undifferentiated service.”

Time will tell if SingTel can succeed on that front and takeaway market share from Starhub and M1 to boost its profits from Singapore. But as of now, investors have to realise that SingTel is a company that has become increasingly dependent on profits from overseas to prop up its overall corporate performance.

And with the Australian dollar falling these past few months, that bulk of profits from Australia stemming from Optus might even be in for more difficulties.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.