Tug-Of-Fools: SingTel – The Bull Argument

SingTelLogoI am David Kuo and here is my Bull Case for Singapore Telecommunications (SGX: Z74)

SingTel is Singapore’s largest telecom company. It has a total customer base of around 477 million subscribers.

Eagle-eyed readers will notice straight away that this number is significantly greater than the population of Singapore. There is a perfectly good reason for this. SingTel has operations in 25 different countries. They include Australia, where SingTel owns the country’s second-largest telecom operator, Optus, and India, where the company has a one-third stake in Bharti Airtel.

One-stop shop

The wide geographic footprint of SingTel could make it an attractive proposition for investors looking for country diversification. Through a one-stop investment, investors can get exposure to a host of different countries, notably Australia, without even venturing offshore. Last year, Australia accounted for about 60% of SingTel’s group revenues and a third of group income.

Some investors might understandably balk at the idea of currency risk. However, for a small country such as Singapore, where growth opportunities might be limited, overseas expansion can be an attractive route to expand in spite of the risk.

Unfortunately, there is no easy way to sidestep currency risk if you invest abroad. The thing to bear in mind is that none of us have any idea about what the Aussie might do against the Singapore dollar. That part of investing we have little control over. You could, if you wanted, hedge against currency risk but that merely adds extra cost to investing, which effectively reduces your return.

For investors, the key question should always be this: Is it better to invest in a business with overseas links which exhibits strong fundamentals but with a risk that the currency might fall or invest in a business with poor fundamentals but a chance that the currency might rise? For me it is always better to try and control something that I have control over rather than try and control something that I can’t.

Strong Fundamentals

In that regard, SingTel’s fundamentals speak for themselves. The company has one of the highest Net Income Margins on the Singapore market. At 21%, it is higher than the average margin of 18% for Singapore’s 30 largest companies in the Straits Times Index (SGX: ^STI). It means that SingTel generated $21 of bottom-line profit for every $100 of top-line sales. Additionally, SingTel’s margin has been consistently high, which might suggest that the company has strong pricing power despite intense competition in the telecom sector.

Another notable fundamental is SingTel’s asset turnover of 0.5. It implies that the telecom company is generating 50 cents in revenue for every dollar of asset employed in the business. That is no mean feat given the high level of existing and on-going investments needed in today’s modern telecoms businesses.

At a time when corporate debt exposure is in focus, it is assuring to see that SingTel is not highly leveraged. Its leverage ratio of 1.7 is not excessive when compared to other Singapore companies. SingTel’s leverage ratio is also significantly lower than its overseas peers that include America’s AT&T (NYSE: T), the UK’s BT Group (LSE: BT.A) and Germany’s Deutsche Telekom. AT&T is about 70% more leveraged than SingTel; Deutsche Telekom is twice as leveraged, while BT is nearly ten times more leveraged than SingTel.

High Income Margin, Steady Dividends

SingTel’s high income margin, efficient use of assets and modest leverage help to explain its impressive return on equity, which is not only above average for Singapore’s blue chips but also one of the highest amongst Singapore’s largest companies. It generates around $17 of profit for every $100 of shareholder equity. That is nearly twice the average for Singapore’s 30 largest businesses.

Shareholders have been amply rewarded by SingTel’s efficiency if they had stuck with the company over the years. Over the last decade, the shares have risen from a dividend-adjusted price of $1.21 to $3.50, which equates to a total annual return of 11.2%. Just over half of the return has come from capital growth and the remainder by reinvesting the dividends.

This highlights the importance of reinvesting the payout that you receive, which in the case of SingTel has been reliable. Over the last five years, SingTel has grown its payout by around 6%, which is faster than the rate of inflation.

Currently, shares in SingTel are valued at 15 times historic earnings, with a yield around 4.8%. The valuation is a little higher than the market average but a premium is only to be expected for a quality company.

It is sometimes said that large companies can be boring investments. But if doubling an investment over seven years is the definition of boring, then please bore me to death.

You can read the Bear argument here.

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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 Director David Kuo own shares in BT Group.