At a time when Starhub and M1 share prices are dropping like flies, Singtel share price is in supreme form. The corrections for Starhub and M1 shares are due to the announcement of the entry of the fourth telco player, TPG Telecom, which made the winning bid of $105 million for the licence in December 2016.
When investing in stocks, always place your bets on the players with the biggest investment moats in the industry. Size matters and you don’t want to catch a falling knife investing in smaller companies which cannot withstand changes in market forces.
Over the past twenty years, the telecommunication industry in Singapore has witnessed an explosive growth in mobile phone penetration rate, growing from 20% to the current 150%. In view of this, the market is already very saturated and the potential for growth is also limited because of Singapore’s small market size. Investors who had placed their faith on domestic players like Starhub and M1 must have reality check as these companies’ growth hinge purely on Singapore market.
Starhub and M1 have amassed huge following among Singaporean investors because of their attractive dividend payouts over the past decade. But experience has taught me that while past performance is relevant, it cannot guarantees future performance. This principle also applies for dividend. Changing market dynamic and competition often impact the smaller players because these factors bite into their market size. Inevitably, companies that lack investment moat will see their profits erode and would be forced to “right-size” their dividend payouts for sustainability purposes.
To put things into perspective, both Starhub and M1 recorded really disappointing financial results for 2016. Starhub’s net profit declined from $372 million in 2015 to $341 million in 2016. M1’s fate was even worse – net profit declined 16.1% year-on-year to $150 million. Given that the fourth telco has not even start operations, perhaps investors of Starhub and M1 should start running for their lives?
On the other hand, Singtel recorded an impressive 3Q performance, with net profit up 4% for the quarter at S$994 million. Pre-tax contributions from regional mobile associates grew 2% to S$660 million. Indeed, being a regional player, Singtel traditionally [This is a premium article. The rest of the content is blocked and can be accessible by SG Wealth Builder Members only. To read the full content, please sign up as member.]
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