Is Singapore Telecommunications Limited Too Big To Grow?

Currently, telecommunications outfit Singapore Telecommunications Limited (SGX: Z74) has a market capitalisation just north of S$69 billion. That’s a big sum.

To put that into perspective, Singtel is not only the largest company in the Straits Times Index (SGX: ^STI), it is also nine and 19 times bigger than its local telco rivals Starhub Ltd (SGX: CC3) and M1 Ltd (SGX: B2F).

With its size, it makes sense to ask if Singtel has become too big to grow. That’s also an important question to think about, especially when considering that Singtel has generated a total return of only 142% (with dividends reinvested) since 1993; that translates to an annualised return of only 4.3% over 22 years.

The seeds for future growth

Singtel has been actively seeking new areas of growth by making investments over the past few years in the technology space. Some of Singtel’s tech businesses are involved with digital advertising, data analytics, and cyber security (the last coming from Singtel’s US$810 million acquisition of US-based Trustwave earlier this month).

From the direction that Singtel is moving in, it’s possible that the Singtel we see 10 or 20 years later will be very different from what it is today.

But that said, much of Singtel’s investments into new areas through its Group Digital Life business segment has been relatively small. This is evident from how the segment only contributed S$169 million in revenue in FY2014 (financial year ended 31 March 2014), a figure that’s roughly 1% of Singtel’s total revenue of $16.9 billion in the same year.

If Singtel would like to diversify its business away from the telecommunications space, it would need to be more aggressive with its investments in its Group Digital Life segment. On that note, Singtel commented in its fourth-quarter FY2014 earnings release that it has allocated “up to S$2 billion for investments in the digital space till FY2016.”

But while Singtel has intentions to spend big, it remains to be seen if its investments in the digital space are well made. In FY2013 and FY2014, the Group Digital Life segment had generated pre-tax operating losses of S$104 million and S$170 million respectively.

Foolish Summary

Singtel is indeed hard at work trying to grow by expanding into new types of businesses beyond telecommunications services.

But, the company’s investments in the digital space are still too small to move the needle at the moment. For there to be fast growth, Singtel might need to engage in way more aggressive investments.

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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 writer Stanley Lim doesn’t own shares in any companies mentioned.