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3 Reasons Why Singapore Telecommunications Limited Is A Safe Investment Now

Singapore Telecommunications Limited (SGX: Z74) or Singtel, is one of the three main telcos in Singapore.

Singapore’s telecommunications industry has come under significant pressure in the last two years, mainly due to the expected change in competitive dynamics amid the entrance of the fourth player, the Australia-based TPG Telecom.

As a result, the incumbents have seen their financial performance and share price weakening in the past two years. Singtel, the biggest among them, was not spared either. At a share price of S$3.23 (at the time of writing), the stock is down by about 17% in the last 12 months.

Nevertheless, it appears (at least to me) that despite all the challenges, Singtel might be a safe investment now. Here are three reasons to support my view. [Editor’s note: An article sharing two more reasons why Singtel is a safe investment has been published. It can be found here.]

Regionally diversified business

Though its name suggests that Singtel is a Singapore-focused company, the truth is that Singtel derives most of its income from overseas.

In its financial year ended 31 March 2018 (FY2018), Singtel generated free cash flow of S$3.61 billion, of which only 31.2% came from Singapore. Australia accounted for 27.4% (this comes from Singtel’s wholly-owned Australian telco, Optus), while dividends from Singtel’s regional associates made up the rest.  These regional associates include Telkomsel from Indonesia, Airtel from India, AIS and Intouch from Thailand, and Globe from the Philippines.

Singtel’s wide geographic reach means that it is unlikely that any one region will bring down the whole group.

Strong balance sheet

A company must be able to withstand the ups and downs in its business cycle to continue to operate and grow over a long period. This is especially true for Singtel as it is currently facing challenges in its Singapore business.

A strong balance sheet allows a firm to: 1) satisfy its existing operational and financial requirements (including paying out dividends); and 2) invest in future growth. Generally speaking, a company with a strong balance sheet will have plenty of cash in its bank and a reasonable debt to equity ratio (not more than 100%).

In the case of Singtel, it has a net debt position of S$9.8 billion on its balance sheet, as at 31 March 2018. This gives it a net gearing of 24.9% (which is a far distance from the 100% ceiling that was mentioned above).

Its strong balance sheet provides it plenty of cushion to withstand short-term challenges in its businesses and also the needed capacity to expand.

Attractive valuation

Last but not least, the decline in Singtel’s stock price has resulted in the telco trading at a rather attractive valuation.

At its current stock price of S$3.23, Singtel has a price-to-book (PB) ratio, price-to-earnings (PE) ratio, and dividend yield of 1.77, 14.9, and 5.4%, respectively. For Singtel’s PE ratio, I’m using adjusted earnings that excludes the telco’s one-off gain from the spin-off of NetLink NBN Trust (SGX: CJLU) in July 2017. For Singtel’s dividend yield, I’m basing it on its ordinary dividend for FY2018.

For context, the PB ratio, PE ratio, and dividend yield for the SPDR STI ETF  (SGX: ES3) are 1.1, 10.3, and 3.1%, respectively. I’m using the exchange-traded fund (ETF) as a proxy for the market since it tracks the fundamentals of the Straits Times Index  (SGX: ^STI). Singtel’s PB and PE ratios are higher than the market’s, but the telco has a significantly more attractive dividend yield.

A Foolish conclusion

The market dislikes the incumbents in Singapore’s telco industry at the moment. However, given the aforementioned reasons, we can argue that Singtel looks like a safe investment (at least for now).

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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.