SingTel Laying the Groundwork for Mobile Growth

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Singapore Telecom is the second biggest telecom operator in the world with 462 million subscribers and dominates Southeast Asia. Unlike China Mobile (NYSE: CHL) with more than 690 million subscribers in China and Pakistan, SingTel’s more diversified base is both its blessing and curse.  Through its subsidiaries, joint ventures and investment portfolio it generates revenue from either the top or second biggest mobile carrier in Singapore, Australia, Indonesia, India, Thailand and Philippines.

Its recent quarterly filings were below expectations due to poor performance in Australia and India. The revenues have been stable over the year at $3.7 billion but its net profit has fallen slightly by 1.6% to $706.3 million due to increasingly poor performance from its Australian operator, Optus. The company’s margins have hovered around 27%. The revenues from its enterprise operations have remained stable over the previous quarter to $1.3 billion (due to organizational restructuring from April 1 (the yearly data for enterprise is not available).

SingTel’s three leading subsidiaries are Telekomsel in Indonesia, in which SingTel holds a 35% stake, Advanced Info Services in Thailand, with a 23% stake, and Bharti Airtel in India, with a 32% stake. All three of these carriers hold the number one market position in their respective countries and have witnessed growth in the number of subscribers; but while Telekomsel and AIS’s quarterly profit before Taxes (PBT) have increased by 16% and 36%,  Bharti Airtel’s has fallen by 17% to $88.7 million (although in local currency terms, the fall is ~1%) due to increasing operational costs. It is one of the issues with investing in SingTel as it grows; the growing exposure to currency fluctuations and the sharp devaluation of the Indian Rupee have harmed SingTel’s bottom line. 

When discussing SingTel, the performance of Optus, the second largest mobile phone operator in Australia and wholly owned by SingTel, is of particular importance. Quarterly revenues at Optus fell by 3.6% from last year to $2.3 billion while its income dropped by 9% to $173.4 million. The outlook for Optus is challenging thanks to competition from Telstra.  SingTel now expects revenue to fall by around 5% in 2013.

SingTel will follow in Telstra’s footsteps by taking control of its distribution channels instead of contracting it out to other retailers, such as Boost Tel, which rebrands SingTel’s service as their own.   Both contracts of this type with Boost Tel and TeleChoice will expire without renewal, paving the way to open 33 new stores under the Optus brand in 2013.

SingTel has lots of cash.  Its problems are not related to cash flow, but rather earnings growth. Free cash flows in the first half of 2012 remained stable at $1.49 billion while it has spent millions this year in a string of acquisitions. From mobile video service provider Vuclip, which allows virtually all mobile phones to play online video clips with high data compression,  to Adjitsu and Amobee to push the company into mobile advertising as well as photo sharing firm and a mobile gaming, SingTel is looking to begin serious monetization of mobile computing to drive growth beyond its core business of minutes and data.

For expansion into China and India, SingTel has laid out an organic expansion plan in its enterprise business that involves investing in sales offices/points of presence to leverage its large geographic area into the growing Southern Asia economy.

<table> <tbody> <tr> <td> </td> <td> <p><strong>SingTel*</strong></p> </td> <td> <p><strong>China Mobile</strong></p> </td> <td> <p><strong>Vodafone</strong></p> </td> <td> <p><strong>AT&T</strong></p> </td> </tr> <tr> <td> <p><strong>Subscribers (millions)</strong></p> </td> <td> <p>462</p> </td> <td> <p>698</p> </td> <td> <p>407</p> </td> <td> <p>105</p> </td> </tr> <tr> <td> <p><strong>YTD Stock</strong></p> </td> <td> <p>0.64%</p> </td> <td> <p>12.91%</p> </td> <td> <p>-9.85%</p> </td> <td> <p>9.60%</p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>12.48</p> </td> <td> <p>10.95</p> </td> <td> <p>N/A</p> </td> <td> <p>43.84</p> </td> </tr> <tr> <td> <p><strong>EPS</strong></p> </td> <td> <p>0.25</p> </td> <td> <p>5</p> </td> <td> <p>-0.55</p> </td> <td> <p>0.76</p> </td> </tr> <tr> <td> <p><strong>Yield</strong></p> </td> <td> <p>5.05%</p> </td> <td> <p>3.98%</p> </td> <td> <p>7.80%</p> </td> <td> <p>5.30%</p> </td> </tr> <tr> <td> <p><strong>ROA</strong></p> </td> <td> <p>10.21</p> </td> <td> <p>13.03</p> </td> <td> <p>1.16%</p> </td> <td> <p>3.92</p> </td> </tr> <tr> <td> <p><strong>ROE</strong></p> </td> <td> <p>17.65</p> </td> <td> <p>19.6</p> </td> <td> <p>-1.96%</p> </td> <td> <p>4.36</p> </td> </tr> </tbody> </table>

*Singapore Telecommunications Limited

Despite the current modest results and poor performance in Australia and India, SingTel is taking the right steps to ensure that it continues to grow in the long term. By adding in a plethora of acquisitions like Vuclip, TMG and Amobee, it will better enable them to avoid the dreaded dumb wire(less) problem, becoming a purely commodity-level service provider. This type of investment is not something the other leading global telecoms, such as AT&T (NYSE: T), Vodafone (NASDAQ: VOD) or China Mobile, engaged in or have been successful with.  But, it is certainly a priority for SingTel.

Recent weakness has pulled the stock price down and pushed the yield up to 5.0%; the stock is trading at a multiple of 13. With the Rupee looking relatively stable now and steps being taken in India to court foreign investment, the worst is likely over for Bharti.  We like SingTel’s aggressive approach to building a suite of social services to support its core business long term, but recognize that if these acquisitions are not integrated properly the stock could easily wind up a value trap.


PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of China Mobile. Motley Fool newsletter services recommend AT&T;, Vodafone Group Plc (ADR), and Vodafone Group Plc (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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