After SingTel's successful listing of NetLink Trust (NLT) in July, SingTel has reduced its effective stake in NLT to 24.99%. In the process, SingTel received a huge windfall, with an excess of $1 billion in cash. There has been much speculation of whether a special dividend would be declared. 

SingTel is expected to use some of these proceeds to pare down its debt or to expand its core business. As for the remaining IPO proceeds, I believe that there is a chance for a special dividend to be declared. The focus on my post would be to evaluate whether SingTel's ordinary dividend payout is sustainable, given that heightened competition in our local market is expected once TPG enters our local market as the 4th telco operator.

TPG's entry to heighten competition

With the local market saturated and TPG Telecom's impending arrival, telecommunications stocks here have taken a beating. While the share prices of its peers, StarHub and M1 have both declined substantially, SingTel has only experience a 10% fall, from its 52-week high of $4.09 to $3.74 today. Investors probably view SingTel as the safest among the 3 incumbents, as SingTel derives nearly 70% of its net profit from Australia and its Regional Associates. Therefore, SingTel would be the least affected by competition in the Singapore market. 

Singapore's current mobile penetration rate stands at approximately 150%, thus the saturated local market has little room for further growth, apart from an increasing popultaion. The arrival of a 4th operator would only reduce the market share of the incumbents. SingTel's advantage in this case would be that its earnings has been well supported by the dividends it receives from its regional associates in Thailand, Indonesia, the Philippines and India.

From the graph above, the amount of dividends that SingTel receives from its regional associates has been rising over the past five years. Given that our local telecommunication market is already saturated, opportunities for growth would have to come from outside Singapore. Although the mobile penetration rate in our neighboring counties are mostly in excess of 100%, growth can still be driven by increases in ARPU, as demand for data services means that consumers would switch to higher value mobile plans.

Sustainability of Dividends

Telecommunications are generally viewed as a defensive sector, and preferred by income seeking investors. SingTel's dividend policy is to distribute between 60 to 75% of its underlying net profit as dividends. For FY2017, SingTel paid out dividends of 17.5 cents per share, which represented a 73% payout ratio. 

To evaluate whether SingTel's dividend payouts are sustainable, I have compiled SingTel's dividend payment record for the past 5 years. 

A crucial metric that I've looked at would be SingTel's dividend payout as a percentage of free cash flow. Free cash flow (FCF) is calculated by deducting capital expenditures (CapEx) from operating cash flow (OCF). As SingTel has to expand and maintain its  telecommunication networks, it incurs capital expenditures, which may be rather intensive from time to time. SingTel's capex comes in two forms - property, plant and equipment, which represents physical assets, and intangible assets, such as licenses and spectrum rights. For example, SingTel paid $573.6 million earlier this year in April to acquire the spectrum rights.

SingTel stated in the footnote of its annual report that their reported FCF was calculated from 'cash flow from operating activities, including dividends from regional associates, less cash capital expenditure'.

However, I realised that if we calculated FCF this way, we would be excluding purchases of intangible assets, such as spectrum rights, which are an integral part of SingTel's business operations. Although the sum spent on the purchase of intangible assets is relatively small, accounting for around 10-30%, compared to the bulk of SingTel's capex  on physical assets (PPE), I believe that considering this figure would provide us with a better understanding of SingTel's free cash flows.

As I have calculated, if we were to use FCF including capex on intangible assets, the amount of dividends that SingTel distributed would exceed its FCF, which gives us a FCF payout ratio of above 100%. Ideally, a company should not pay out more in dividends than its FCF, as the shortfall would have to come from its cash balance or proceeds from its cash flows from financing activities. Having its dividend payout ratio consistently exceeding FCF would mean that we do not have a margin of safety in the event of an earnings decline.

Future Outlook

I believe that once TPG starts operations here, a price war would be inevitable. However, the market has probably priced in the expected decline in earnings from local subscribers. SingTel and the other incumbents have already began to roll out new price plans with attractive offers, in order to retain customers. Assuming TPG comes in with an aggressive pricing strategy, the incumbents may have to further lower their prices to compete. 

For FY2018, the huge cash inflow from the NetLink Trust IPO proceeds would probably help SingTel sustain its dividend payout. However, with increased competition in the near future, maintaining a FCF payout ratio of above 100% may mean that any decline in earnings would be accompanied with a cut in dividends.

My Valuation

Calculating the average FCF including intangible assets for the past 5 years, we arrive at an average adjusted FCF of $2,898 million. If we want to be slightly on the side of caution, and we require a more conservative FCF payout ratio of 90%, dividends payout should be approximately $2,608 million, or 16.0 cents per share based on 16,340 million shares outstanding. Thus, depending on our expected yield, we can they decide on a reasonable entry price. At SingTel's closing price of $3.74 today, a dividend of 16.0 cents would give us a yield of around 4.3%

Personally, as I believe telcos are a defensive sector, I would be satisfied with a yield which is closer to 5%. 

Note: I am vested in SingTel at an average price of $3.67

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For September, there's not much to update, as I had only executed one transaction.

Latest portfolio holdings can be found here: My Portfolio

Purchased Jumbo at $0.54, because I am positive on their move to expand into Asia. As of yesterday, Jumbo closed at $0.57, which represented a 5.6% gain. This is a long term holding as I await their expansions plans to unfold. Nonetheless, if Jumbo were to surge to an extremely high valuation, such as a price earnings ratio of above 30, I would consider selling.

More details can be found in my earlier post: Jumbo at 52-week low.

Received dividends of $0.33 per share from DBS. I was fortunate to have accumulated DBS during the market correction in late 2015, at below its net asset value. After receiving a few rounds of scrip dividends, my average price has decreased to $15. However, this time round, I did not opt to receive scrip dividends, because I felt that dividend reinvestment price of $20.88 per share was too high. The cash dividend that I received was added back into my warchest instead.

SGX went ex-dividend, distributing 13 cents per share. However, its share price did not fall ex-dividend. This was probably because of the upgrade given to SGX by Goldman Sachs, citing an improved outlook for equity and derivatives trading volume. Goldman Sachs has an $8.50 target price for SGX.

I'm still in the process of rebuilding my portfolio, and some companies on my watchlist include ComfortDelGro, SATS, SingTel, Raffles Medical and Mapletree Commercial Trust. Cash makes up 24% of my portfolio, so I am looking at 2 to 3 new additions to my holdings.

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This post is a continuation from my article on ComfortDelGro's valuation yesterday.

Previous article: ComfortDelGro: A safe entry price?

In my previous article, I had arrived at a valuation for CDG's taxi business segment, using its net asset value. As some users on InvestingNote have pointed out, using CDG's net asset value may not be the most appropriate valuation method, as the vehicles may not be liquidated at book value.

Based on the feedback, I've revised my calculations, to take into account the projected fall in taxi fleet numbers, revenue, profit margins and earnings.

Valuation of Taxi Segment

Here's how I arrived at my updated valuation for CDG's taxi business, along with some key assumptions:

Source: LTA website

As per LTA statistics, the CDG's taxi fleet numbers have been steadily declining month-on-month for the past year. In July 2016, CDG had 17,044 taxis, and one year later, this figure dropped to 15,472 as of July 2017 - a 9.22% fall. This statistic corresponds with the fall in taxi revenue for CDG, which fell 8.3% year-on-year from $673.9 million in 1H 2016 to $618.5 million for 1H 2017.

For FY 2016, the total revenue for the taxi segment was $1,340.8 million. Since we expect the taxi revenue to fall by 8.3%, our pro forma revenue for FY 2017 would be $1,340.8 x 91.7% = $1,229.5 million.

Figures obtained from CDG's Q2 financial report

I calculated the net profit margins for both 1H 2016 and 1H 2017 using net profit excluding investment income, as the investment income had artificially boosted 1H 2017's earnings. For example, operating profit fell but net profit rose due to one-off gains from investment income. I also assumed that the effect of finance costs and taxes were proportionately split among the various business segments, therefore the taxi segment contributed the same percentage for both revenue and net profit.

Using this projected revenue for FY 2017, I came up with a range of scenarios, with varying severity for the decline in revenue and net profit margins. 

Net profit from taxi segment, based on FY 2017 pro forma revenue of $1229.5 million

Taking the median value from the table above, I arrive at a projected net profit of $73.16 million for FY 2018. This gives us an earnings per share of 73.16 / 2,162.8 = $0.03383. Applying a minimum P/E ratio of 10x, which was CDG's lowest P/E ratio during the Global Financial Crisis in 2009, and a maximum P/E ratio of 14, the current P/E for CDG's shares, we get a valuation of between $0.338 and $0.474 per share for CDG's taxi business. For some perspective, the net asset value for the taxi business is $0.468 per share.

In my previous article, I valued CDG's remaining business segments at $1.339, using a P/E ratio of 14. Therefore, based on my calculations, the fair value for CDG's shares should be between $1.68 and $1.81.

Factors that may affect my Valuation

CDG is still in talks regarding a partnership with Uber, and a mutually beneficial deal could potentially reverse the fall in revenue for the taxi segment.

Another possible catalyst would be if the regulators decide to impose more restrictions on the private hire companies, to level the playing field. However, an outcome similar to London suspending Uber's license may be a double-edged sword, at that would mean no partnership, and CDG would have to face Grab alone, the stronger of the two private hire companies. 

My opinion of the competitors

I've seen comments about how Grab's current practice of burning cash would be unsustainable, but we should note that they have just raised $2.7 billion from SoftBank and Didi Chuxing in July this year. 


By some estimates, Grab is burning between $500k and $1 million daily, but even if this goes on, it could be sustained for years. I don't expect this price war to end anytime soon.

Fundamentally, there is no difference in the service quality provided by CDG and Grab - we've all experienced our fair share of rude or reckless cabbies and private hire drivers. The only difference is in price, and CDG has to revise its pricing to attract customers. This would definitely impact earnings in the near term.

Note: As of writing, I do not have a long or short position in ComfortDelGro.

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