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SingTel and Netlink NBN Trust.

Tuesday, August 15, 2017

Some people keep asking me what have I bought recently. 

Hmm. Let me see.

Eggs, extra virgin olive oil, butter, dark chocolate, matcha ice cream and some other stuff.

What? Wrong answer?

Jokes aside, to those who like asking me what did I buy or if XXX stock can buy or not, you should know you would be disappointed most of the time with my answers.

You have been warned. ;)

Anyway, in an interview a few years back, when asked what was the first company I ever invested in, my answer was SingTel

Like many Singaporeans then, we were given a chance to buy discounted SingTel shares by Mr. Goh Chok Tong who wished for Singaporeans to think about investing in stocks to help grow our wealth. People my age or older would probably remember this.

I am still holding on to those shares and collecting dividends, year after year. 

Is that the best way to achieve greater returns? 

I don't know but I know it generated pretty decent and safe returns.

Since then, over the years, I went on an adventure as an investor, trader and speculator in the stock market. 

I made some money and lost some money. 

I think I must have made more money than I lost or else I would probably be in IMH by now.

In my retirement, I tell myself that I must not be too adventurous with money. So, I bought more SingTel shares in 2015. 

Informed by charts, I added to my investment in SingTel as its share price retraced to what I thought were supports and I did that again recently.

My decision is now partly emboldened by the listing of Netlink NBN Trust which effectively strengthens SingTel's coffers by some $2 billion. 

So, SingTel has become a more valuable company after the sale, more valuable than it was in 2015.

When asked whether I was interested in Netlink NBN Trust at its IPO, the answer was in the negative. A 5% yield just didn't cut it for me.

With relatively high depreciation and replacement costs to be considered as well, a structure that pays out most of its cash flow to shareholders probably means much higher debt in time to come. 

I wonder about the sustainability of its dividends in the longer run. 

To invest in Netlink NBN Trust, therefore, I would demand a much higher yield than 5% as a compensation. 

This could be achieved through a higher DPU which is unlikely or a lower unit price which is probably more likely to happen.

In comparison, I believe that SingTel's dividends are more sustainable. 

There is talk of a special dividend but whether there is going to be a special dividend from SingTel or not does not matter to me. 
With a payout ratio of 60% to 75% of net profits, I will be quite happy with a 3.5% to 4.5% regular dividend yield. Lower than Netlink NBN Trust's 5% but it gives me peace of mind.

Looking at the chart, it looks like there is a chance that SingTel's share price could weaken again in future but it could bounce up first. This is the trader in me talking. 

Don't ask me what could cause this because I don't know.
However, I do know I would like to buy more if SingTel's share price should go much lower, all else remaining equal.

Related post:

1Q 2017 passive income.


AK71 said...

On my FB wall:

Kelvin Tan:
I remembered starting a CPF account with cash then, just to participate in the Singtel IPO in 1993.

Spur said...

Yeah, still have those original STA and ST2 shares in my CPF account. Had to top-up my CPF with cash in 1993 as I was in final year Uni, and my CPF from all those part-time jobs too pathetic to max out the allocation for STA shares. Haha!

Many years ago, my CDP account suddenly appeared with couple hundred ST shares. Unbeknownst to me, my late grandma had apparently nominated me for part of her discounted ST shares. Still have those for keepsake --- getting tens of dollars each year in dividends --- kopi money from beyond the grave!! Haha!!!

AK71 said...

Hi Spur,

I was in university too and I also had to top up my CPF account. Haha.

Good kopi money for the win. ;)

redponza said...

Hi AK,
There is a 4th telco getting into Singapore, don't you worry about the intensified competition?

Also, unlike REIT where there is minimum capital expenditure, telco needs to upgrade their network consistently to maintain competitiveness. With the lower yield, and meh growth potential, not sure why it is better than REIT.

In the telco space, isn't Starhub better with a much higher dividend yield?


AK71 said...

Hi redponza,

SingTel derives less than 20% of its revenue from Singapore. It is truly an MNC.

As for CAPEX, selling away most of its stake in Netlink NBN passed a heavy baby to other investors. SingTel retains only a 25% stake in the newly listed entity.

If you are worried about the 4th Telco and increased competition in Singapore, you should be more worried about Starhub since it derives about 70% of its revenue from Singapore.

This is also probably why Mr. Market demands a higher dividend yield from Starhub which incidentally also has a higher payout ratio compared to SingTel.

AK71 said...

One more thing, we really shouldn't be comparing Telcos with REITs. The yields are not comparable.

SingTel pays out a percentage of its earnings as dividends while REITs pay out from their operational cash flow.

If we were to use the same yardstick for both, we would worry about REITs since their DPU is usually higher than their EPS.

redponza said...

Is telco attractive?

From my point of view, return = dividend yield + dividend growth, taking debt into consideration.
There is lower growth and lower yield in telco, thus I am puzzled why telco is even considered in the first place.

And from a price to book standpoint, they can never beats a REIT =.=

But on the other hand, I saw famous investors grabbing telco companies, hence I must be missing sth here?

AK71 said...

Hi redponza,

Like I said, they are different animals.

It depends on how we look at investments and how value is created.

Most REITs pay out more than they earn. They do not retain any earnings.

SingTel pay a percentage of their earnings and they retain some earnings so that they become more valuable over time.

I like some REITs and my portfolio is rather heavy in REITs. So, it is sensible to become less dependent on REITs especially when conditions have become less benign for them.

It is about having a more holistic approach.

AK71 said...

Frankly, not all REITs are good investments.

We should wonder at the sustainability of distributions.

A REIT could have high CAPEX down the road:

A REIT could see their assets disappear in the not too distant future:

So, we must be careful when we lump REITs together to say that REITs can never be beaten in terms of return on investment. The quality of returns and the sustainability are pertinent considerations.

AK71 said...

I look at Singtel's annual report. I can't derive the 20%. It is 40+ % to my calculation. How did u derive it? 

Well spotted. I meant to say its Singapore mobile business which is, of course, what would probably be impacted by the entry of a 4th Telco next year. That business segment accounts for 13% of SingTel's total revenue.

AK71 said...

>$2 billion = >15 cents per share in proceeds raised from the IPO of NetLink NBN Trust.

AK71 said...

Reader says...
I went for your talk last year and bougt Dbs.
My regret is I bought no enough.
After your talk this month, I bought Singtel.
I bought and maybe I should buy more.
What does your crystal ball say?

AK says...
Crystal ball blur blur. -.-"
I don't know if the price is going higher or lower but I think SingTel offers a fairly good dividend yield even at the current price.

AK71 said...

Reader says...
I would like to consult u, in your opinion and own valuation, what is the fair price that Singtel's share ideally should be?
These couple of weeks, I've accumulated a 6 figure sum of Singtel's shares and hope to keep it for the very long term to "compensate" for the loss of dividend income from CRT privatisation.
Many thanks in advance for your wisdoms 🙏

AK says...
Alamak. Too cheem for me. I also dunno fair price. I only know what I blogged about. 😞
I think it is safe enough 🙂

AK71 said...

According to DBS, Singtel is now in a position to invest $1 billion in growth companies without taking on too much debt.

In the next five years, Singtel’s growth business (ICT and digital) is expected to make up 40 percent of its revenue, from the current 25 percent.

Furthermore, Singtel is at a valuation discount. Its core telco and digital business is trading at just 5.6 times FY18F EV/EBITDA compared to its peers.

By similar metric, M1 is trading at about 7 times, Starhub is at about 9 times while regional peers average about 7.5 times.

This was culminated by Singtel’s flat share price over the last three years while regional associates saw a 35 percent rise in their valuations.

DBS notes that this could be due to mounting losses in the digital businesses, resulting in a lack of positive sentiments.

However, with digital advertising arm Amobee achieving an earlier-than-expected positive EBITDA in 2Q18, DBS expects the deep valuation gap between Singtel and its peers would close as investors accumulate Singtel at a discount.


ThinkNotLeft said...

"Furthermore, Singtel is at a valuation discount. Its core telco and digital business is trading at just 5.6 times FY18F EV/EBITDA compared to its peers."

Not sure how DBS gets the 5.6 EV/EBITA. Yahoo Finance shows EV/EBITA of 13.3.

If the 5.6 EV/EBITA include the one-off earnings from NetLink IPO, then using it compare against StarHub and M1 seems incorrect.

- using Shareinvestor 10-year historical financials, Singtel eps has been flattish since 2010. Its eps is 24.55cents in FY Mar 2010 and 23.96 in FY Mar 2017.
- its share price has been range-bound between $3.50-$4.40 in 2013-2017.

AK71 said...


We have to take all these numbers with a pinch of salt. ;)

Maybe, someone who is finance trained could enlighten us. :)

AhJohn said...

hi AK, I studying Netlink trust.

The distribution policy by the trust:
"The Trust’s distribution policy is to distribute 100% of its cash available for distribution (“CAFD”), which includes
distributions received from its wholly-owned subsidiary NetLink Trust (“NLT”). NLT’s distribution policy is to
distribute at least 90% of its distributable income to the Trust after setting aside reserves and provisions for,
amongst others, future capital expenditure, debt repayment and working capital as may be required."

EPS 0.01~0.02, but DPU 0.0568. Seems unsustainable, but I also not sense it's considered as an issue from management's view at financial report.

How about your view? Or they just distribute the "cash flow", not earning?


AK71 said...

Hi Ah John,

Definitely, it is a concern.

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