Why SINGTEL AND STARHUB stock price may rebound!

Introduction

With the launch of 5G, fifth generation technology communications network. It will revolutionise connectivity, being much faster and has a more extensive application. It can be used to power machine learning, healthcare, cars, healthcare and IoT (Internet of things).

Singapore is transitioning itself into a smart nation. Hence, 5G will be a key driver of growth in the future.

However, why are Singapore listed telecommunication companies in distress?

This is reflected in the falling stock prices over the years. In this article, we will discuss if we could see a rebound in 2 of the largest telco companies in Singapore.

Singtel and Starhub are considerably cheap.

Both these two telcos are asset heavy. Looking at their 5y P/B, they are trading near it's all time low. 

Singtel has a P/B of 1.43 while Starhub has a P/B of 3.96.

If you pull up share price charts, you can see that this ratio has slid over time to an all time low.

What is Singtel doing moving forward?

In their Q1 investor presentation and annual report, Singtel has unveiled a new strategic trajectory; digitalisation.

It has plans to divest some of its current assets and invest into its enterprise business. According to the annual report, Singtel  will be selling some of its infrastructure assets such as towers, satellites and data centres.

Funds from the sale will be used to invest into the enterprise business, which revolves around ICT and digital services. This is strategy is similar to that of Capitaland's recent restructuring to make its business "asset-light." As this type of businesses are generally more profitable than asset-heavy ones.

According to CEO Mr Yuen Kuan Moon, “This strategic reset is the most significant move in recent years to refocus the business and capitalise on technology proliferation and large-scale digitalisation.

To capitalise on this digital trend, Singtel has plans to invest NCS.

This subsidiary that has recorded 7 consecutive years of positive revenue growth. NCS has the expertise to serve other businesses and key governmental sectors. Cybersecurity is the key growth driver for NCS. However, it has set it's sight on expediting growth in the healthcare, transport and financial sector in Singapore, Australia and Greater China.

On the consumer front, they launched GOMO, a digital mobile brand. It's service was adopted by many of it's regional subsidiaries Optus, AIS, Globe as well as Telkomsel to cater to the needs of millennial customers. 

With a strong regional presence, Singtel wants to leverage on Asia's fast growing digital economies. It will build a digital ecosystem with it's regional associates to capture growth in digital services. It encompasses lifestyle products such as e-wallets, services such as cybersecurity and fintech.

What is Starhub doing moving forward?

Starhub strategy is similar where it is going digital.

They expect to see growth from Cybersecurity and Regional ICT services.

It has acquired Strateq in July 2020, a Malaysia based data-driven business solution and ICT company. It's cybersecurity arm Ensign is a key player in Singapore, where it offers bespoke solutions and service to clients cybersecurity needs.

The aim of their digitalisation and automation aims are to enhance customers experience, increase efficiencies and to increase cost savings. It is reported that digitalisation has led to more than $210M savings.

On the consumer side of the business, Starhub launched giga!

This is also extremely similar to Singtel GOMO where it is a SIM only digital brand. In addition, it has exclusive agreement with Disney+ to attract more customers to it's PAY TV. They usually bundle this with it's mobile or broadband segments. 

Will 5G license be the saving grace for them?

Singtel and Starhub has been bleeding ever since the IMDA liberalised the telco market.

New entrants tried to gain market share by undercutting prices of incumbent firms. This led to a price war where the cost per gigabyte for mobile plans decreased 25 times, compared to 5 years ago.

With heavy investments in 5G, Singtel aims to regain market share in both Singapore and Australia. This will also be used to support it's enterprise business it 5G cloud solutions and increase efficiencies in the business. 

Starhub is doing the same, where investments in 5G is used to support it's 5G IoT solutions. It will synergize platforms intelligently and deployed for a myriad of applications such as analytics.

Both Singtel and Starhub has come up with their 5G Stand Alone (SA) network. It is much faster and strengthens authentication and encryption capability. It futher empowers IoT, education, healthcare and augmented reality.

Hence, 5G is one of the main drivers for the telco companies. With increased speed and functionality, they can expect to see growth in user base.

What are the risks involved

While the new digitalisation trajectory may be a key growth for the telcos, we should be aware of some risk associated before investing in them. 

1. Critical systems failure

Throughout the years, customers have experienced multiple internet disruptions. Such outages cause much inconvenience especially with more people working from home due to the pandemic.

As a result, the telcos have been slapped with fines by the IMDA. Frequent occurrences may lower customer confidence and hence, see a drop in user base. 

2. Crowded digital space

If you were to look at Cyberscape chart below, you can see how saturated the market is. Singtel and Starhub are facing international competition such as Crowdstrike, Microsoft, IBM, etc.

With intense and possibly better solutions out there, it is difficult for their digital segement to grow substantially. 

3. The 5G market share will erode over time.

While they might have won the license, the increase in prices is not sustainable. They might have an exclusive to sell 5G but the agreement will expire.

Similar to 4G where IMDA will liberalise to make it a competitive consumer mobile industry. Hence, their market share is likely to erode when that happens.

Closing thoughts

It is evident the telco industry is deemed as an unattractive investment. However, with valuations near an all time low, could we potentially see a rebound?

This really boils down to how much grow they can experience post restructuring. 

If I were to choose which to invest in, I would pick Singtel over Starhub.

While both companies have extremely similar strategies, Singtel has an edge. It has businesses over the region and a stable footing in both Singapore and Australia. The P/B is also lower than that of Starhub.