Understanding Earnings of Singapore's Top Companies

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    [November.2024] Revenue decline and dependence on dividends? How to evaluate Singtel's financials

    In Singapore, Singapore Telecommunications ( $Singtel (Z74.SG)$ ) is a household name, thanks to its essential telecom services. Over the past four years, Singtel's stock has shown impressive stability, doubling in price since the end of 2020 and surging 30% this year alone.

    Source: The data listed in the table come from the corresponding company's 10-K.Images provided are not current and any securities are shown for illustrative purposes only and is not a recommendation. Past performance is no guarantee of future results.
    Source: The data listed in the table come from the corresponding company's 10-K.Images provided are not current and any securities are shown for illustrative purposes only and is not a recommendation. Past performance is no guarantee of future results.

    However, when looking at a longer timeframe, Singtel's performance appears less remarkable. Despite the recent gains, its stock price is essentially flat compared to ten years ago. So, what drives the stock's movements? Much of it ties back to the company's financial performance.

    Singtel is set to release its latest earnings soon, which might present a potential trading or investment opportunity. Before that, investors may need to understand how to interpret the earnings report.

    Key aspects to focus on include revenue growth, profitability, and dividend payouts.

    1. Revenue growth

    Singtel primarily operates in the telecom sector, with core businesses including Singtel Singapore and Australia's Optus. The company also has stakes in telecom operators across countries like Indonesia and Thailand.

    Currently, the majority of Singtel's revenue comes from telecom-related services such as mobile and broadband. Since these services are somewhat public utilities, explosive revenue growth is challenging.

    Over the past decade, Singtel's revenue has gone through two distinct phases. From FY 2014 to FY 2019, revenue remained stable, fluctuating around S$17 billion. However, starting in FY 2020, the company experienced a decline due to the pandemic and increased competition, with revenue dropping to approximately S$14.1 billion by FY 2024. This revenue stagnation is likely a key factor in Singtel's lackluster long-term stock performance.

    [November.2024] Revenue decline and dependence on dividends? How to evaluate Singtel's financials -1

    Despite the challenges in its core revenue streams, Singtel has a promising area for potential growth: its data center business. With the rapid rise of artificial intelligence, the demand for data and computing power has surged, opening new opportunities in data centers. In recent years, Singtel has been building data center infrastructure in Singapore, Indonesia, and Thailand, with total capacity expected to exceed 200 MW.

    However, since most new facilities are not yet operational, the data center segment currently generates less than S$500 million in annual revenue, accounting for under 5% of total revenue.

    Looking ahead, it may be crucial to monitor whether Singtel can stabilize its core telecom revenue and if the data center projects can ramp up quickly once they are operational, potentially becoming a significant growth driver.

    2. Profitability

    Given the backdrop of declining revenue, how has Singtel performed in terms of profitability? Key metrics to consider are gross margin, operating margin, and return on equity (ROE).

    [November.2024] Revenue decline and dependence on dividends? How to evaluate Singtel's financials -2

    Gross Margin: Since 2014, Singtel's gross margin has gradually declined from nearly 90%, experiencing a sharp drop to about 65.6% in 2020 due to the pandemic. However, it has since begun to recover, rebounding to over 71% in FY 2024.

    Operating Margin: Similarly, Singtel's operating margin has been on a downward trend, falling from around 16% a decade ago to approximately 6% today. A significant factor in this decline is that while revenues have decreased, costs related to employee salaries, sales, and management have not been proportionately reduced, resulting in high operating costs and negatively impacting profit margins.

    Return on Equity (ROE): Once approaching 20%, Singtel's ROE has dropped significantly in recent years. This decline is largely due to decreasing operating profits and lackluster performance from its associated companies, leading to a drop in net income from over S$5 billion to under S$2.5 billion, with instances of falling below S$1 billion. Consequently, the ROE fell to below 5% in FY 2024.

    Moving forward, it will be important to monitor whether Singtel can maintain its recovery in gross margin, achieve revenue growth to stabilize operating margins, and gradually restore its ROE from its current low levels.

    3. Dividend payouts

    Amidst soft revenue and declining profitability, Singtel has managed to stabilize its stock price and even achieve significant gains this year, largely due to its generous dividend policy, in addition to the growth potential of its data center business.

    In the capital markets, many publicly listed companies, after transitioning from a phase of rapid growth to a period of stable development, tend to return excess cash to shareholders through stock buybacks or dividends, as they no longer require significant funds for expansion. In Singapore's market, most companies opt for dividend payouts.

    [November.2024] Revenue decline and dependence on dividends? How to evaluate Singtel's financials -3

    Since FY 2014, Singtel has accumulated a net profit of approximately S$30.3 billion, with total dividends amounting to around S$29.2 billion. This means that dividends have accounted for 96% of its net profits. Even during the significant profit declines from FY 2020 onwards, Singtel continued to maintain substantial dividends, distributing around S$9.4 billion between FY 2020 and FY 2024, far exceeding its net profit during that period.

    This generous dividend policy may be a key reason why Singtel has managed to retain some investors and maintain a relatively stable stock price despite the overall decline in performance.

    In upcoming financial reports, it will be important to monitor whether Singtel can sustain its history of high dividend payouts, as this could be a crucial factor in its long-term stock performance.

    In summary

    When analyzing Singtel's financial reports, we should focus on three main areas: revenue growth, profitability, and dividend payouts.

    1. Revenue Growth: We should pay close attention to whether Singtel can halt the decline in its core telecom services and achieve rapid growth in its data center revenue.

    2. Profitability: It's important to monitor if Singtel can sustain its rebound in gross margin, stabilize its operating margin, and improve its return on equity (ROE) from its current low levels.

    3. Dividends: We should also keep an eye on whether Singtel can maintain its generous dividend policy, which has been a key factor in attracting and retaining investors.

    [November.2024] Revenue decline and dependence on dividends? How to evaluate Singtel's financials -4

    Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy.

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