Banks Data As of 26 December 2016 Unless Otherwise Stated
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A MOTLEY FOOL SINGAPORE SPECIAL REPORT Investing Hot Spots to Kickstart 2017 Winter 2017 3 Investing Hot Spots to Kickstart 2017 Investors we’ve met are often at a loss as to where they What Attracts Us should be looking for opportunities. There are more than Shares of Singtel, StarHub, and M1 haven’t done too well 700 companies listed in Singapore—so, where should the over the past two years. This could partly be due to general search begin? market malaise – after all, Singapore’s stock market, as repre- Since it’s the start of a new year, we thought it’d be a great sented by the Straits Times Index (SGX: ^STI), is down by idea to put together a brief on some groups of stocks that we’re 14% for the same period. Another possible factor at play is watching in 2017 as potential long-term investing opportunities. more industry-specific, which we will come to later. Before we dive in, it’s worth noting that none of the stocks Singtel has suffered the least with its share price down by mentioned in this report are meant to be taken as official rec- ‘only’ 7% over the past two years. StarHub and M1 have seen ommendations. We’re just pointing out some interesting areas their share prices fall by 33% and 47%, respectively. The in the market that we’re seeing, at the moment. telcos’ lower share prices have resulted in attractive valua- tions in relation to history. This report also contains what we believe are useful discus- sions on the businesses, opportunities, and risks associated You can see this in the two charts below. The first shows with the three different groups of stocks that would be covered. their price-to-earnings (PE) ratios over the past five years. And as you can see, StarHub and M1’s PE ratios are near With that, let’s get going! five-year lows, while Singtel’s PE ratio is in the middle of its Telecommunications historical range. Data as of 24 December 2016 unless otherwise stated Telecommunications services providers—or telcos, for short—are a group of stocks that we think are worth watching in 2017. The telcos are Singapore Telecommunications (SGX: Z74), StarHub (SGX: CC3), and M1 (SGX: B2F). They are likely to be household names for many of you reading this, given that their services—mobile plans, broadband plans, cable TV sub- scriptions, etc.—touch the lives of millions of Singaporeans. Singtel is the largest of the trio by market cap and it actually has a huge business presence outside of our shores, too. In its fiscal year ended 31 March 2016, 71% of Singtel’s profit came Source: S&P Global Market Intelligence from other countries. StarHub and M1 occupy the second and third spots, respectively, in terms of market cap and they The second chart illustrates their dividend yields for the generate their revenues predominantly from Singapore. same period. You can see how their yields are all currently near five-year highs. With that, here’s why the telcos are worth watching in 2017. 2 The Motley Fool Special Report fool.sg The Risks Involved Recently, Australian telco TPG Telecom emerged as Singapore’s fourth telco after being declared in December 2016 as the winner in the New Entrant Spectrum Auction (NESA) held by the Infocomm Development Authority of Singapore. Thing is, the Singapore authorities had already officially declared that they were keen to allow a new entrant as early as July 2015. The potential of a new competitive force entering the fray may have scared investors away from the incumbent telcos – this could have contributed to their poor stock market performances over the past two years. There could be good reasons for investors to worry. In 2016, Source: S&P Global Market Intelligence the management of Singtel and StarHub had both commented Singapore’s three telcos have a history of generating that a price war could erupt if a new player was to enter the stable profits, operating cash flows, and free cash flows. We scene. And even without the new telco, the incumbents had think this is a consequence of their business models. In our started engaging in a price war in March 2016. view, telecommunications services are more of a need than TPG Telecom thinks that it can capture 5% to 6% of the a want—and this results in steady demand from customers market within a short period of time, once it starts offering through both good times and bad. its services in Singapore in 2018. If it succeeds, it’s very likely that the Singapore-based business results of the trio of (All numbers in $$, millions) incumbents will be hurt. The impact, though, is not likely to Singtel FY2012 FY2013 FY2014 FY2015 FY2016 be spread evenly. Profit 3,989 3,508 3,652 3,782 3,871 M1 is perhaps looking most at risk here. It has a narrower Operating cash flow 5,710 5,818 5,350 5,787 4,648 geographic source of revenue compared to Singtel, and has a Free cash flow 3,452 3,759 3,248 3,549 2,718 thinner portfolio of services when compared to StarHub (for StaeHub 2011 2012 2013 2014 2015 instance, StarHub has a sizeable pay-TV business, unlike M1). Profit 315.5 359.3 379.5 370.5 372.3 But for now, those living in Singapore only have the ser- Operating cash flow 696.2 689.5 594.7 654.9 544.5 vices of Singtel, StarHub, and M1 to choose from. Free cash flow 449.7 416.8 291.9 333.3 215.7 M1 2011 2012 2013 2014 2015 The Bottom Line Profit 164.1 146.5 160.2 175.8 178.5 We think the low valuations and historic business stability Operating cash flow 285.6 274.9 302.0 272.9 239.1 of Singtel, StarHub, and M1 have made the telco space worthy of a deeper look. But, there are also significant risks to their Free cash flow 182.9 152.4 176.7 133.2 105.6 businesses to consider, as we’ve detailed above. Source: S&P Global Market Intelligence Over 2017 and beyond, we will be watching how the All three companies are also finding avenues to grow competitive landscape develops when TPG Telecom officially beyond consumer mobile. For instance, Singtel is trying to starts operating in Singapore. We will also be watching to see grow a cybersecurity business and has a relatively new busi- how the incumbent telcos’ growth plans develop. ness segment focussing on new digital technologies, such as digital marketing and advanced analytics. Meanwhile StarHub is looking at the enterprise space as a growth op- portunity. As for M1, it is tapping into areas such as data analytics and the Internet of Things. When companies with defensive businesses and avenues for growth have attractive valuations in relation to history, our interest is piqued. But the analysis doesn’t stop there. The risks have to be considered, too. fool.sg Special Report The Motley Fool 3 Banks Data as of 26 December 2016 unless otherwise stated We think banks are also worth keeping an eye on in 2017. Singapore is the financial hub of Southeast Asia and is home to some of the largest financial institutions in the region. Finance has also been an important part of Singapore’s economy. In 2015, the financial and insurance industry accounted for 12.6% of Singapore’s Gross Domestic Product. The banking sector is also by far the largest within the Straits Times Index, with a 34% weighting (as of 30 November 2016); the Source: S&P Global Market Intelligence second largest is real estate investment & services, with a The local banks are not only trading at low valuations in weighting of just 13%. relation to their historical records—they are also at lower P/B Singapore’s three listed banks, namely DBS Group Holdings ratios when compared to their peers within Southeast Asia. (SGX: D05), Oversea-Chinese Banking Corporation (SGX: O39), and United Overseas Bank (SGX: U11), have footprints The Risks Involved in many countries and have been actively expanding their Globally, banks are adjusting to myriad new regulations presence outside of Singapore. They also provide a wide range that have been set after the Global Financial Crisis. Many of financial services such as investment banking, transactional banks have also been slapped with huge financial penalties financing, foreign exchanges services, private banking, digital for their role in the crisis, with fines running into the billions banking, and insurance services. of dollars. This has created huge uncertainty over the sector as a whole, making investors nervous about the future landscape What Attracts Us of the industry, as well as the future liabilities of some banks. There are also many triggers for trouble in the global and/ The long-term business prospects of financial institutions in or regional economy, such as a slowdown in China, territorial Singapore look good to us. Singapore recently surpassed Hong disputes in the South China Sea, unrest in the Middle East, Kong as the third-best financial centre in the world. Moreover, Brexit, and a new U.S. president. the ASEAN economy is expected to continue growing in the mid-single-digit percentage range over the long term, partly Closer to home, there are also specific issues for Singapore due to the ASEAN Economic Community initiative. banks to grapple with. The economic growth of Singapore has been slowing in recent years and there is even talk of a Given Singapore’s status as a global financial centre, a possible recession.