Singtel Deteriorating Fortunes Amidst Soaring Competition

Southeast Asia largest telecom operator Singapore Telecommunications (Singtel) is facing its biggest test in recent years. Shrinking profit margins amidst soaring competition are the latest tailwinds that raise serious concerns about the company’s long-term prospects.

Singtel Deteriorating Financial Performance

The company is fresh from reporting its weakest financial results in more than a decade. The financial results once again highlighted the challenges that the telecommunication juggernaut is facing in key markets, as rivals continue to expand into a highly competitive industry.

Slowing business in Indian has seen the company post its lowest annual profit in 16 years. An admission by the company’s CEO, Chua Sook, that the company faces intense competition in key markets should raise concerns about the company’s growth metrics.

Singtel share price has declined significantly over the past few years on investors reacting to the company’s deteriorating financial performance. In the recent quarter, the company reported a net profit of S$541 million, down 35% year over year. It also represented a 30% sequential deterioration from the fourth quarter of fiscal 2018.

Weakness In India Business

A plunge in net profit stems from a spike in losses at Airtel India, amidst higher depreciation and amortization costs in networks and spectrum. Excluding net loss accrued from the Airtel business, the telecommunication juggernaut generated a 3% decline in profit.

Airtel India is turning out to be a dark spot in the company’s business, especially on overall pre-tax earnings contributions dropping. Higher network costs compounded by finance charges associated with the expansion of 4G-network expansion in India also continue to affect the company’s financial performance.

Excluding Airtel India performance, contributions for regional associates would have risen 10% mostly driven by the Indonesia business. Telkomsel remains a bright spot for Singtel, has posted an 18% increase in earnings driven by growth in data and digital services.

The first-quarter financial results signal that the company is crumbling at the backdrop of heightened competition in markets with more players. Sustained industry headwinds, as well as subdued economic growth attributed to slow growth in the global economy, also continues to take a toll on the company’s growth rate.

Net revenue from Australia operations was up 8% in the recent quarter, driven by growth in NBN migration revenue as well as equipment sales and handset leasing. Optus unit also benefited from the addition of 50,000 postpaid handset customers. However, service revenue declined 7% attributed to data price completion as well as an increase in the mix of Sims-only customers.

Singtel Bounce Back Plans

To shrug off the emerging headwinds and bounce back to growth, management has turned its attention to the digitization of the core communication business. The company is planning to innovate more on digital products and services as a way of differentiating itself from the competition.

Differentiation of services through innovative digital products and services should allow the company to cater to diversified customer lifestyle needs, consequently grow its target market. One of the plays involves the bundling of insurance coverage for prepaid customers. The use of Dash at hawker centers as well as public transport is also part of the new marketing strategy.

“We are currently leveraging our collective synergies and strengths to create a regional digital ecosystem that will serve our 700 million customers in the growing areas of payments, gaming and esports,” explained Mr. Sook.

Singtel is also investing vast sums of money on technology as part of an effort that seeks to drive service innovation. Investing in technology should allow the company to simplify most of its processes, consequently raise productivity. Cost savings will also have to come into play as part of an effort of boosting the bottom line.

Singtel 5G and 4G Investment Drive

The Chief Executive Officer expects Singtel to benefit from investments already made on regional assets, especially on network upgrades. Growing smartphone adoption in India, Indonesia should lead to an increase in demand for digital content, products, and services expected to support the core business.

In addition to network upgrades in India and Indonesia, Singtel has also made substantial investments in network spectrum in Australia. The rollout of 5G wireless service is on schedule from which the company expects to draw in lots of customers given the growing demand for high-speed internet services.

Singtel has also invested vast sums of money in enabling 5G wireless services in the Philippines, another important market whose performance could help shrug weakness in other markets. In the Philippines, the company has also gone a notch higher by developing 5G powered applications to target customers in advanced manufacturing as well as maritime industries

Singapore remains a key driver of the company’s bottom line as the company operates a monopoly given the subdued competition. The company continues to enjoy strong demand for its all-digital and no-contract GOMO plans. Consequently, postpaid customers increased by 35,000 in the quarter.

Singtel Outlook

Excluding the potential impact of acquisitions, management expects consolidated revenue for the Group to grow by mid-single-digit. Consolidated EBITDA, on the other hand, should increase by high single-digit.

Capital expenditure, on the other hand, is expected at about $2.2 billion made up of $1.4 billion from Optus and $0.8 billion from the rest of the units. Dividends is expected at about $1.2 billion attributed to lower earnings at Telkomsel unit.

Singapore Telecommunication Industry Outlook

Over the next few years, telecommunication companies in Singapore will be forced to consolidate. The market is becoming overcrowded with the entry of mobile virtual network operators. Competition driven price war poses another danger that could see heavyweights shed a significant amount of market share.

The fact that Singapore is open to entraining at least seven mobile service providers in addition to TPG Telecom should be a point of concern for Singtel. More players in the industry could accelerate Singtel revenue decline given the impact of increased competition as well as price wars. Analysts have already warned that Singtel EBITDA margins could shrink by one to two points over the next 18 months, with the entry of new players into the industry.