The Motley Fool

2 Risks That Investors Should Know Before Investing In Singapore Telecommunications Limited

Singapore Telecommunications Limited (SGX: Z74) is one of the most recognisable companies in Singapore, given that it is the largest telco in our local market.

In an article I wrote and published two weeks ago, I shared three reasons why investors may want to consider investing in Singtel. The reasons are its geographically-diversified income stream, track record of paying a stable dividend, and attractive valuation.

But, no company is without risk, and Singtel is no exception. In this article, I want to share two risks that I think all investors should know before investing in Singtel.

Weakening performance in Singapore

The competitive environment in Singapore’s telco market has led to subpar results from the company’s Singapore business.

In the fourth quarter of its financial year ended 31 March 2018 (FY2018), Singtel reported that revenue from its Singapore business was down 1.1% year-on-year to S$1.73 billion, while EBITDA (earnings before interest, taxes, depreciation, and amortisation) fell by 11.3% to S$520 million. For the whole of FY2017, the telco’s Singapore business experienced a 0.3% decline in revenue to S$6.7 billion, and a 4.9% slide in EBITDA to S$2.40 billion.

Singtel attributed the weakness in its Singapore business to declines in the Consumer segment.

Negative sentiment

There can be many reasons behind a stock’s price movement. But, the reasons can generally be classified as business-performance-related, or investor-sentiment-related.

The latter is about the overall mood of market participants – are investors more greedy than fearful, more pessimistic than optimistic et cetera? In general, negative emotions (fear and pessimism) tend to drag down the prices of stocks while positive emotions (greed and optimism) tend to push up stock prices.

From what I see, investors’ sentiment towards the telcos is rather negative at the moment. This is due to an impending change in the already-competitive environment of the local telco market. The Australia-based TPG Telecom won the bid for Singapore’s fourth telco license in December 2016, and is expected to launch its service in the second half of 2018.

As such, there is no guarantee that Singtel’s stock price will not continue to fall -in the near future as the market grapples with the higher level of competition that the company has to face.

A Foolish takeaway

The recent decline in Singtel’s stock price may have attracted investors to the company. But, there are also risks they ought to be clear about before investing in the company.

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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.