Singapore Telecommunications Limited (SGX: Z74) is one of the most recognisable companies in Singapore, given that it’s the largest telco in our local market.
Over the past two years or so, the incumbents in Singapore’s telco market – besides Singtel, there are two others in StarHub Ltd (SGX: CC3) and M1 Ltd (SGX: B2F) – have seen their businesses come under pressure due to competition from communication apps and streaming services. And that’s before they have to contend with the entrance of a fourth telco. In December 2016, the Australia-based TPG Telecom won the bid for Singapore’s fourth telco license. TPG Telecom is expected to launch its mobile service in Singapore in the second half of this year.
Singtel’s latest earnings update – for its fiscal year ended 31 March 2018 (FY2018) – reflected the challenges that the company is facing; its underlying profit for the year declined by 8.4% year-on-year to S$3.54 billion.
Nevertheless, there are still bright spots within the company’s diversified businesses. In this article, I will discuss three areas of Singtel’s business that performed well in FY2018.
Growth in Australia
In FY2018, Singtel derived 24% of its underlying net profit from its wholly-owned Australia subsidiary, Optus.
During the year, Optus delivered growth in both revenue and net profit. The former was up by 3.4% to A$8.71 billion whilst the latter increased by 2.8% to A$817 million. Optus’s free cash flow did even better, jumping by 90.0% to A$948 million.
The strong performance was driven by the addition of 380,000 new mobile subscribers, 225,000 new NBN (National Broadband Network) broadband customers, and strong growth in the ICT (Infocomm Technology) and Managed Services businesses.
Growth in ICT business
Singtel’s ICT solutions are value-added services that include cyber security, cloud computing, smart city solutions, and more.
This part of the business performed well for Singtel overall in FY2018, with its revenue up by 4.1% to S$3.07 billion. In particular, the cyber security, smart cities, and cloud services’ revenues grew by 17% from S$940 million in FY2017 to S$ 1.1 billion.
Looking ahead, Singtel has integrated its cyber resources into a global unit. The company expects the integration to drive operational synergies and strengthen its position as a leading managed cyber security services provider.
Stability in associates
In FY2018, Singtel’s share of its associates’ post-tax profit was down by 10.9% to S$1.82 billion. At first glance, this is a bad result.
But, there were two main factors that had masked the otherwise good performance of Singtel’s associates. As a quick introduction, Singtel’s main associates and joint ventures are Telkomsel in Indonesia; AIS and Intouch in Thailand; Airtel and BTL in India and Africa; and Globe in the Philippines.
The factors are the weak results from Airtel and BTL, and negative currency movements. In fact, at constant currency terms, and excluding Airtel and BTL, Singtel’s share of its associates’ post-tax FY2018 profit would have been flat at S$ 1.77 billion. Not that bad after all.
The Foolish takeaway
Singtel appears to be a hated stock at the moment, with a 13% decline in price over the past six months. Yet, investors should not overlook the three bright spots within the company that I mentioned above when carrying out their research.
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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.