It seems that a growing number of investors are becoming disillusioned with Singapore’s blue-chip stocks, which have shown lackluster performances for a while.
SingTel serves as a prime example. Despite its already low share price, it has recently dipped to its one-year low.
Digging deeper into its history, I found it startling that one would have incurred a loss of 2%, buying SingTel stock a decade ago and holding it until now. Astonishingly, this is the case even after accounting for dividends!
SingTel, which once stood as Singapore’s largest stock, has now fallen behind the local three banks in market capitalization.
What happened?
SingTel is currently grappling with significant operational and strategic challenges.
Optus Network Outage and Leadership Change
Optus, which contributed a significant 52% to SingTel’s revenue in FY23, has recently been at the centre of operational turmoil. This subsidiary’s performance is crucial to SingTel’s financial health, but recent setbacks have put this contribution at risk.
Optus faced a major network outage, a critical issue for any telecom provider, given the reliance of customers on uninterrupted service. This problem stemmed from a glitch with the routers during a routine software update, But SingTel has refuted the update was the cause, so no one knows what went wrong and that’s even more worrying. The slow recovery was exacerbated by the need for staff to manually reboot systems nationwide. The incident not only disrupted services but also led to public relations challenges and potential loss of customer trust.
Adding to these troubles was the resignation of Optus’ CEO, Kelly Bayer Rosmarin. This departure in leadership has raised questions about the subsidiary’s future direction and stability, and this upheaval has contributed to the recent dip in SingTel’s share price.
Commoditization of Telco Services
The telecom sector, historically characterized by high-priced monthly subscriptions, has dramatically shifted towards commoditization, offering little in terms of product differentiation. This shift has sparked fierce competition, leading customers to focus mainly on cost which led to a price war. SingTel, too, has felt the impact of these market changes, contributing to its share price’s lackluster performance.
SingTel’s strategy to expand and acquire international telcos like Optus and Bharti Airtel hasn’t paid off as expected. This trend of commoditization is global, affecting all players in the field.
It’s important to note, though, that telecoms are providing essential services. But when these services become basic necessities, there’s a general push, often government-led, to lower prices to make them more accessible, much like water and food. They can’t be overly expensive. As a result, lower prices lead to squeezed margins for telecom companies.
Diversification Didn’t Work Out (Yet)
SingTel certainly hasn’t been sitting idle; they’ve actively pursued new ventures, aiming to diversify beyond the telecom business. But so far, these efforts haven’t quite hit the mark. Let’s take a look at some of their past initiatives.
Remember Skoob, launched by SingTel in 2011? It was an e-book service, part of their push to become a multimedia solutions provider. Sadly, it shut down just two years later.
Then there was the acquisition of HungryGoWhere in 2012, which merged with inSing.com, aiming to become Singapore’s go-to lifestyle and search site. However, the rise of food blogs and influencers ate into HungryGoWhere’s market share. InSing.com couldn’t keep up with Google Search and was going nowhere. SingTel ended up shutting HungryGoWhere in 2021, selling it to Grab in 2022, and closed inSing in 2019.
There’s also Trustwave. SingTel bought this cybersecurity firm for $810 million in 2015, only to sell it off recently for a mere $205 million – another venture that didn’t pan out.
Currently, SingTel is teaming up with Grab for the digital bank GXS. It’s still early days for this project, and it hasn’t yet made a significant dent in the revenue or market impact for either company.
Spin-offs to Unlock Value
SingTel still possesses valuable assets, and there’s lingering hope that the company might unlock their value through strategic spin-offs, similar to the successful case of Netlink Trust. That particular move brought in an exceptional gain of S$2.03 billion from selling down its stake in Netlink, benefiting shareholders with an additional $0.03 dividend per share from the sale.
There are still several assets within SingTel’s portfolio ripe for spin-off, as discussed in a previous article.
One potential candidate is Digital Infraco, which comprises a suite of data centers that could feasibly form a REIT. Another option could be scaling down its stake in Optus and removing it from its consolidated financials. Lastly, there’s NCS, which could stand as an independent IT services company.
Nothing Much For Shareholders in the Near Future
For the past decade, SingTel shareholders haven’t seen much benefit, except for the 3-cent dividend from the Netlink Trust deal. But as it stands, it doesn’t look like any more spinoffs are on the horizon. This means elusive capital gains and, potentially, a further decline in share price when bad news hits. SingTel’s dividends have been consistent, yet they’re not particularly impressive, hovering below a 5% yield.
The core business isn’t showing signs of improvement either. Take the 5G network, for example; it’s a costly infrastructure investment that’s not helping SingTel grow. If SingTel can’t monetize it swiftly, the prices for 5G services are bound to drop over time, leading to yet another round of margin compression. The telco sector is increasingly being viewed as a public good.
All things considered, there aren’t many reasons to expect a rise in SingTel’s share price. In fact, it might be fair to say that SingTel’s lacklustre stock performance is deserved. With little potential for share price appreciation and a dividend yield that doesn’t turn heads, SingTel currently doesn’t make an investment case.
