Sunday 1 December 2013

Yield and Currency Diversification into Singtel

In recent weeks, we highlighted a number of equity investment opportunities. These included Daiman Development, Matrix Concepts and the Selangor water concessionaires of Gamuda, Puncak Niaga and Kumpulan Perangsang Selangor. We were also negative on China Stationery, HB Global, Asiasons, Blumont and LionGold. The stock performances of these companies are listed in the table below. Obviously we are not always right, at least in some cases, not yet.

Making money is great. But keeping the money you made is critical.

In capital markets where non-equity investments are less sophisticated, many of us would look at some risk diversification within our equity portfolio.

This is what we have decided to share this week.

Singapore Telekom (SingTel) is the largest listed company on the Singapore Exchange by market capitalization and 51.88% owned by Temasek Holdings, the investment arm of the Singapore Government.

It controls 47% market share of the island’s telco business.  It has diversified regionally into Indonesia, Philippines, Thailand, Bangladesh, India, Malaysia, Sri Lanka and Africa and now serves a total of 468 million mobile customers.

It is trading at a low valuation of less than 17 times price to earnings, much lower than all its smaller competitors in Singapore and Malaysia. We believe this reflects the weaker earnings for this financial year due to forex losses from the weaker currencies of Australia, India, Thailand and others relative to the Singapore dollar as well as operational challenges at Optus, its Australian operations.

Despite paying a competitive dividend yield, its dividend payout ratio is only 75% of the profit it makes. As a result, the Company is able to invest strongly in capital expenditure, amounting to 12.5% of its revenue each year.  This is an industry of rapid technological changes and to stay ahead, companies must be able to make huge investments.

For those who are more interested in a pure Singapore play, then the alternative is M1. Its earnings will grow as it is the first operator to offer nationwide 4G services and it is focused on the mobile business. At current prices, it offers a yield of 4.9%.

As a comparison, the yields for the very safe and large consumer companies listed on Bursa are in the range of 3.6% to 4.7%. These are companies like Nestle and British American Tobacco. These companies are extremely well managed with excellent track record on governance and transparency. Their earnings are very stable and are market leaders for their products.

SingTel is both a growth and defensive stock, pays a Sing dollar dividend yield of 4.5% and is trading at a reasonable valuation. SingTel is definitely worth a closer look for anyone looking to mitigate risks in their existing stock portfolio.

There is, however, no need to rush as it is a huge company and the stock is unlikely to go up by 10% like what happened to Daiman last week.

This article is published in the upcoming Edge.

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