No other industry has the potential to modernize emerging markets as dynamically and quickly as telecommunications. When we think about overseas telecommunication companies, the first names that come to mind may be giants China Mobile (NYSE:CHL) and Vodafone (NASDAQ:VOD), but what about the other 800-pound gorilla in the room, SingTel (OTCPK:SGAPY)?
Singapore Telecommunications, or SingTel, is one of the largest telecommunication companies in the world. Tracing its roots all the way back to 1879, the company is now the largest telecom provider in Singapore with 47% of the mobile market and 84% of the fixed-line market. SingTel first started trading publicly in 1993 when 11% of the shares were offered by Temasek Holdings. Temasek Holdings, an investment company owned by the Singapore government, still controls the majority of the shares (51.88%). Today, Singapore is a major commerce and trading center that is highly dependent on reliable and modern telecommunication infrastructure. Additionally, by the company's own estimates there are more than one million retail Singapore investors with an interest in the company. For these reasons, it is in the best interest of the government to provide a business friendly environment for SingTel going forward.
Admittedly, the Singapore telecom market is highly saturated with Starhub and M1 competing for SingTel's business. However, the company is far from being limited to the local market. In 2013, local business in Singapore accounted for only 23% of EBITDA. The company operates in Australia under its wholly owned subsidiary called Optus. Here it is the second-largest telecom provider in the country and accounts for about 31% of EBITDA. SingTel also has major investments in Indonesia, the Philippines, Thailand, Bangladesh, and India. In a sense, SingTel is like a regional telecom ETF.
As of March 31, 2013, the company had a base of 468 million mobile customers spread across 25 countries in Asia and Africa. For comparison, their customer base is on par with the combined populations of the United States, Mexico, and Canada.
SingTel trades on the Singapore exchange, where it is the largest listing in the country. It also has a major listing on the Australian exchange. U.S. investors can access SingTel through its ADRs listed on the pink sheets, where it has an average daily volume of about 33,000 shares. One share of the ADR is equivalent to 10 ordinary shares in Singapore. Traditionally, SingTel pays an interim dividend in January and then a slightly larger final dividend in the fall. The company aims to have a dividend payout ratio between 60% to 75% of underlying net profits. The dividends are not subject to a withholding tax. It should be noted that cash dividends are declared in Singapore dollars and then converted into U.S. dollars so the payments are subject to currency fluctuations. The following graph represents dividends paid on the SingTel ADRs in USD.
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Since 2009, the company has managed to either maintain or increase regular dividend payouts (a one-time special dividend of about $0.80 was paid in 2011). However, the dividend payout ratio has increased from about 58% in 2009 to about 74% in 2013. Currently, SingTel shares yield 4.59%.
Looking closer at the financials, underlying profits were down year over year by 2.68%. The company attributes the decline to currency fluctuations and slight underperformance for the year with Airtel. However, inspecting the free cash flow, the company has the ability to generate positive, consistent free cash flow from all divisions.
The year-over-year increase in free cash flow in 2013 can be attributed to increased dividends from Telkomsel and AIS, as well as strong cash flow from Singapore operations. As of the end of September 2013, net debt stood at a manageable $5.2 billion USD. SingTel maintains one of the strongest credit ratings in the region with an A+ rating by Standard & Poor's and an Aa3 rating by Moody's.
Despite the increasing payout ratio and slight decline in year-over-year profits, don't count SingTel out. The company has recently committed $1.6 billion over the next three years in digital investments to stay at the forefront of mobile technology. Additionally, SingTel has the ability to generate strong, consistent free cash flow and is committed to providing shareholder returns. It will remain a regional powerhouse for the foreseeable future. Reliable operations in Australia and Singapore provide the financial backbone of the company, and its presence in emerging markets provides the potential for strong growth in conjunction with the rise of the middle class.
Disclosure: I am long OTCPK:SGAPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: Do your own due diligence. I am not an investment professional. The information presented in the article was obtained from company documents and sources believed to be reliable. However, the information has not been independently verified. Therefore, the author cannot absolutely guarantee accuracy. Please contact a qualified investment advisor before making investment decisions. I am not responsible individual investment decisions.