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Author:   |   Latest post: Mon, 9 Dec 2019, 6:43 PM


6 Reasons Why I Think DBS' Report On Singtel Is Overly Bearish

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I am writing this in a response to an article from DBS which caught everyone's attention regarding the likelihood that Singtel may cut its dividend for the first time in 20 years from FY2021 onwards.

If you have not read the article, you can read it here.

In the article, the analyst drew from the thesis that Singtel might have to cut its "unsustainable" dividend payout to 13 ~ 15 cents/share mainly due to the increasing capex requirement from the 5G spectrum roll-out, the declining mobile users and deteriorating regional associates performances, which is mainly attributed to Bharti and Telkomsel (slowing growth).

While the general thesis may sound reasonable at glance, I think the dividend cut from the current 17.5 to 13 ~ 15 cents from FY2021 onwards may be overly bearish.

Here's 6 reasons why.

1.) The Group Can Technically Still Afford 17.5 cents Payout

We are talking here about a company that is one of the biggest market cap in Singapore and has never cut its dividends in the past 2 decades (~20 years).

In order to pay out 17.5 cents of dividends, Singtel would have to fork out a total amount of $2.85b, which if we use FY2019 as reference typically consists of a $1.11b (6.8 cents/share) interim dividend and $1.74b (10.7 cents/share) final dividend.

The Group gave a guidance that FY2020 Free Cash Flow to come in at $2.4b from their Singapore operations and another $1.2b from their regional associates, which adds up to $3.6b. However, this amount excludes the spectrum payments for the 5G roll-out which is only expected to be finalized in 2021, which the Group is forecasting at $2.2b.

Technically speaking, the Group has still the capability of paying out 17.5 cents/share to shareholders, cutting which will bring about spiral speculation about the company. 

2.) The 5G Network Capex Can Be Shared Among Mobile Operators

We can all agree that the 5G network is a huge capex commitment that the mobile operators cannot incur as a stand alone because it just doesn't make sense.

The likelihood will be a sharing model among the mobile operators and capex costs to be shared.

If we take reference from countries such as the US or Korea or China, they are already sharing the network even among competitors.

China Telecom, for instance, has announced that it is ready to build a 5G mobile network with its rivals in order to share the capex costs and to maintain their BAU capex guidance in the next 2 years.

3.) Singtel Has Trump Cards On Their Hands They Haven't Played Yet

The ICT business revenue model from the digitalisation technologies which include cyber, cloud, analytics, AI and IoT are one monetization platform which the Group can undertake a strategic review on the back of a smart nation concept.

The cyber security nation concept has recently gained traction news when Temasek decided to buy into the stake of security system D'Crypt, which Starhub previously bought back in 2017.

Another digital arms - Amobee and Videology, which are part of the digital life division are also another potential divestment opportunity that they can raise their funds from.

This will help to free up cashflow required to fund further network capex, if necessary.

4.) Telkomsel is Coming in from a Low 2018 Base

Telkomsel is one of Singtel's promising star of their regional associates that are still growing.

If you look at Telkomsel results more in depth, you'd see that their network users are up by 5.17m from the low base point of 2018 of 163.4m to 168.6m this year.

This helped to push their earnings higher despite a 6% drop in their call usage.

With revenue mix starting to shift towards the data service (now taking up 34% of total revenue) rather than call usage, there is still room for growth to increase the data service users.

5.) Singtel's Gearing Is At Reasonable Level

Singtel has a net debt of $11.8b in the group's book (including consol of all the subsidiaries), which translates into a 28.4% gearing or 2x their EBITDA + Share of Regional Associates EBIT Profits.

This is a very strong position for a telecom company not just in Singapore, but comparatively across the globe. 

Technically, they can gear up higher and yet still re-affirm their credit rating by assuring they have the cash flow that can cover the interest.

6.) Too Early For Singtel To Cut Dividend

If you notice the trend for Starhub, it took them close to 8 years before they realized that their dividends are unsustainable, mainly because their business fundamentals do not improve and they decide to cut thereafter.

What I am saying is there are many ways corporate actions can take place to raise funds and dividend cuts is probably one of the last option they will undertake just because it is so damn unpopular and likely market sentiments will spiral down from here (even if in the eyes of a prudent investor).

A company as big as Singtel is likely to be more prudent in their dividend policy. 

The higher likelihood in my opinion is another year of fixed dividend policy before transitioning them slowly to a variable policy like Starhub based on earnings. 

A variable policy pegged to earnings and cashflow is a nicer way to tell investors that the company is in the transitioning phase and is likely to conserve cash as part of the retained earnings for future capex needs.

With that said, this is not an inducement for investors to buy Singtel.

I think they'll be in a tough transition phase environment in the next few years but one that could come out strongly if the execution is done perfectly.

Thanks for reading.

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