Singtel should take a leaf from Keppel's book when it comes to investor communications

WHEN I heard last week that Singtel was appointing a new CEO, my first thought was that it could be time to buy the stock.

Then I read the news release from the company, and changed my mind.

Among other things, the news release suggested that Singtel's outgoing CEO, Chua Sock Koong, is leaving the company well-positioned for the future; and that new CEO, Yuen Kuan Moon, will build on the success Singtel has achieved.

For investors like me, these are not harmless platitudes but a worrying signal that Singtel's board and senior management - who surely must have endorsed the news release - do not plan to change the way the company is run and unlock the potential value of its depressed shares.

Singtel has none of the hallmarks that investors would ordinarily associate with being successful and well-positioned for the future.

This column pointed out back in August that Singtel generates less earnings now than it did a decade ago. Its cumulative "underlying" earnings per share for FY2018 to FY2020 is almost 24 per cent lower than for FY2010 to FY2012. (Singtel has a March 30 financial year-end).

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Singtel also has a balance sheet burdened with significantly more debt than 10 years ago. It ended FY2020 with net debt of S$12.5 billion, almost twice the net debt of S$6.3 billion it had at the end of FY2010.

Moreover, Singtel's accumulation of debt has outpaced its profit growth. For FY2020, the ratio of Singtel's net debt to its earnings before interest, taxes, depreciation and amortisation (Ebitda) and pre-tax profit contributions from its associates stood at 2.0 times. In FY2010, the same ratio stood at just 0.9 times.

With the Covid-19 fallout and the need to keep investing in its network, Singtel now appears to be heading for a financial crunch. Notably, the company cut its final dividend for FY2020 to S$0.0545 per share, bringing its total ordinary dividend for the year down to S$0.1225.

Singtel paid total ordinary dividends of S$0.175 per share for each of the preceding five financial years. It also paid a special dividend of S$0.03 per share for FY2018.

None of this has gone unnoticed by the market. Last month, Singtel's share price hit a 12-year low.

Yet, there is a huge amount of value that can be unlocked at Singtel. In a report last week, DBS Group Research said the combined market value of Singtel's public-listed regional associates - which include Telkomsel in Indonesia, Bharti Airtel in India, AIS in Thailand and Globe in the Philippines - is equivalent to S$2.49 per Singtel share.

Singtel's shares closed at S$2.16 on Friday. So, in effect, the market is ascribing a negative value to Singtel's core business in Singapore and Australia.

Failing to acknowledge the market's currently weak confidence in Singtel and express an awareness of the potential value of its underlying assets was a wasted communications opportunity by the company to turn the page on its past with the appointment of its new CEO.

Keppel's big plan

Singtel should perhaps take a leaf from Keppel Corp's book to win back the support of investors.

Much like Singtel, Keppel has faced strong headwinds for some time. Things came to a head recently, when the group made major impairments to the carrying value of various assets related to its offshore and marine (O&M) business.

For H1 2020, Keppel reported a net loss of S$537 million, compared to a net profit of S$356 million for H1 2019, after S$930 million of impairments.

Besides making investors nervous, these impairments provided Temasek Holdings with the opportunity to back out of an unfortunately-timed partial offer by invoking a "material adverse change" pre-condition.

In October last year, before Covid-19 emerged, Temasek had proposed to acquire 554.9 million shares in Keppel at S$7.35 each, to raise its direct stake in the company from 20.45 per cent to 51 per cent.

With the withdrawal of the partial offer, Keppel's share price tanked. The stock is down about 35 per cent since the beginning of this year. It closed at S$4.40 on Friday.

At their current level, shares in Keppel are trading at a nearly 23 per cent discount to its net asset value as at June 30 of S$5.70 per share, which some analysts say is unwarranted.

Unlike Singtel, however, Keppel is not shying away from telling the world how it intends to fix its problems and lift its depressed stock price.

On Sept 29, the company said in a news release that it had identified S$17.5 billion worth of assets that can be monetised and channelled towards growth initiatives. Over the next three years, Keppel plans to monetise S$3-5 billion worth of these assets.

Keppel also said it would conduct a strategic review of its beleaguered O&M business, exploring both organic and inorganic options.

"Organic options include reviewing the strategy and business model of Keppel O&M, assessing its current capacity and global network of yards and restructuring to seek opportunities as a developer of renewable energy assets; while inorganic options would range from strategic mergers to disposal," the company said.

Face up to reality

So, what exactly should Singtel's new CEO do to unlock value?

The first step is to face up to reality. Singtel's profitability has been weakening for years, and the company was becoming increasingly indebted. The economic fallout of Covid-19 is simply accelerating the process. A recovery in economic activity may bring some respite, but it will not fix Singtel's underlying problems.

In the short term, Singtel should address concerns in the market about its ability to maintain its dividend. It should consider options to strengthen its balance sheet, by identifying assets that can be monetised. It should also carefully consider the likelihood of its listed associates - which account for the bulk of its value - needing its support to weather the Covid-19 fallout.

If further dividend cuts may be necessary, Singtel should proactively prepare the market for the disappointment and ensure that any adjustment it makes is more than sufficient from the outset. Yet, it should prioritise investing in its 5G network in order to maintain its market position and profitability.

In the longer term, Singtel should ensure that its retained earnings are consistently put towards initiatives that deliver tangible financial returns and lift its market value.

Singtel's new CEO should determine why the group's return on equity and return on invested capital trended lower during the past decade even as its debt levels climbed. And, he should commit to closely tracking and reporting Singtel's performance on these fronts in the future.