Are You Aware Of The Regulatory Risks That Singapore Telecommunications Limited Is Facing?

Singapore Telecommunications Limited (SGX: Z74) is a giant telecommunications company with annual revenues of over S$16 billion and business interests in many countries.

Any company, big or small, faces risks that could damage its business. In Singtel’s latest annual report – for its fiscal year ended 31 March 2016 – the company discussed the regulatory risks it has to deal with.

I thought it’d be very useful to share Singtel’s discussion. Many governments around the world see their domestic telecommunications sector as a vital component of their respective countries’ long-term development plans.

Understanding Singtel’s regulatory risks and how it intends to address them will help investors better evaluate the company’s long-term profitability.

Loss of licenses

Singtel’s businesses depend on licences that are issued by government authorities. If the company fails to meet regulatory requirements, the penalty could range from fines to the revocation of licences. This applies to both Singtel’s Singapore-based as well as overseas businesses.

Restrictions to investing overseas

Another way Singtel is exposed to regulatory risk is related to its overseas investments.

As a background, the company has full ownership of Australian telco Optus and substantial stakes in large telcos (those that hold the first or second positions) in countries such as India, Thailand, Philippines, and Indonesia. The India-based telco also has operations in 15 countries in the African continent.

Singtel’s investments abroad are “subject to the risk of imposition of laws and regulations restricting the level, percentage and manner of foreign ownership and investment, as well as the risk of nationalisation.” Put another way, Singtel might one day be forced to part with its investments in the foreign telcos at unfavourable terms because of governmental action.

Implementation of national broadband networks by governments

Singtel’s business in Singapore and Australia is impacted by the implementation of national broadband networks in both countries.

The company describes the situation:

“In Singapore, the Infocomm Development Authority of Singapore (IDA) has, in its implementation of the Next Generation Nationwide Broadband Network (Next Gen NBN), designed a structure to level the playing field to make the benefits of the Next Gen NBN available to all industry players.

This has significantly altered the existing cost model of the industry and increased the level of competition from new entrants.

In Australia, the government is currently undertaking a significant reform of the fixed-line telecommunications sector, including the rollout of a national broadband network (NBN) to be operated on a wholesale-only open access basis. It is possible that the regulatory reforms could ultimately lead to a sub-optimal or negative outcome for Optus.”

It is worth noting that Singapore’s telco market had existed with just three players (the other two are StarHub Ltd (SGX: CC3) and M1 Ltd (SGX: B2F) for a long time before things changed in December 2016 when Australian telco TPG Telecom entered the scene.

Final Foolish musings

What I have above is a quick summary of the regulatory risks outlined by Singtel in its latest annual report.

Given that risks and the management of risks are part and parcel of running a company successfully, it is important that investors understand the risks associated with a company before investing in it.

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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 Lawrence Nga doesn’t own shares in any companies mentioned.