Singapore Telecommunications Limited: What’s Next? – Part 2

Welcome to the second part of the series on the major drivers of Singapore Telecommunications Limited’s (SGX: Z74) business growth.

In my previous article, I covered the revenue dynamics for the company.

In here, I’d like look at the profit, cash flow, and balance sheet of the global communications outfit.

As a quick recap: Singtel’s shares are up 31% from 1 April 2010 to its closing price on 6 March 2015. Over the same timeframe, the capital gains of the SPDR STI ETF (SGX: ES3) – a proxy for the market barometer, the Straits Times Index (SGX: ^STI) – was up by only 16%.

In addition, over the past five of SingTel’s completed financial years, the company has distributed a hefty annual dividend totaling around 89.4 cents per share.

Financial Year ended 31 March Dividend per share (Singapore cents)
2010 14.2
2011 25.8
2012 15.8
2013 16.8
2014 16.8

Source: Singtel’s Website

A closer look at profits and cash flow

As Asia’s leading communications group, the business of Singtel can be divided into three major buckets.

The Group Consumer segment comprises of its consumer communication services in Singapore and Australia and other investment stakes in telecommunication outfits across Asia. The Group Enterprise segment provides communications infrastructure, cloud computing, and other services to enterprise customers. Finally, the Group Digital L!fe business comprises of new internet technologies like mobile advertising, e-commerce and hyper-local services.

Singtel chart - 3 Singtel chart - 4

Source: Singtel’s Earnings Report; EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization

For the financial year ended 31 March 2014 (FY2014) and FY2013, SingTel segmented its revenue by its business units. Prior to FY2013 (FY2010 to FY2012), the company’s revenue was organized by geography.

The profit line is where the share of results from Singtel’s associates and joint ventures comes to the fore. For instance, in FY2014, the contribution from associates and joint ventures took up a hefty 29% of Singtel’s EBITDA.

Let’s take a look at cash flow next.

Singtel chart - 7

Source: Singtel’s Earnings Report;

From this view, we can see that Singtel has enjoyed stable free cash flow for its last five financial years. The presence of positive free cash flow is important, as it could serve to support the regular dividend that Singtel pays out. This dividend may be the differentiator between a winning or losing share.

SingTel's balance sheet

Source: Singtel’s Earnings Report

The picture is less promising on Singtel’s balance sheet though. The company’s cash and cash equivalents position has been dwindling while borrowings have been inching up. This is certainly something to keep a close watch on.

Foolish summary

As lifelong students of Foolish long term investing, it pays to look under the hood to understand whether a rise in a company’s share price is supported by the quality of profits and growth that we are looking for.

As of Singtel’s closing price of $4.18 on 6 March 2015, the telco traded at a trailing price/earnings ratio of about 17.8 and has a historical dividend yield of around 4% (based on its payout for FY2014). It is notable that Singtel’s dividend yield currently exceeds the distribution yield of 2.74% provided by the SPDR STI ETF.

However, this historical look at Singtel’s revenue and profits seem to suggest that it would be increasingly difficult for the company to find new sources of sustained growth in revenue. Furthermore, the piling up of borrowings and the dwindling cash position does not inspire confidence that future growth can be funded from current operations.

Under such an assumption, Foolish readers may want to pay close attention to the price paid for the company’s shares in order to generate adequate returns.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.