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Tug-Of-Fools : SingTel – The Bear Argument

SingTelLogoI am Louis Kent Lee. Here is my bear case for SingTel (SGX: Z74).

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

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

But what’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 compare the share performance of SingTel against the Straits Times Index (SGX: ^STI) and its peers StarHub (SGX: CC3) and M1 (SGX: B2F) over the past year.

Looking at the chart below, one would have 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 to 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.

Singtel Relative Performance

Share price performance of SingTel against STI and its peers

Lowest Piotroski F-Score Amongst Peers

Using the latest full-year results of SingTel and its peers, a comparison using the Piotroski 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 scores range 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

Piotroski 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 a possible 9 points 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 shows just how much SingTel is dependent on the performance of Optus.

SingTel Segmented Revenue

SingTel’s segmented revenue

From the segmented revenue breakdown above, one would have noticed that that Australian revenue contribution has, 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 has, 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 been 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% 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, the 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.

You can read the Bull argument here.

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