Sunday, April 16, 2006

The Singtel story 0 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
Quick, which is the worst performing IPO that is still trading actively in the SGX in our generation (say, after the 1990s)? In absolute terms, that is. I have no numbers to prove it, but judging from Singtel's market capitalisation and its price performance since its IPO >10 years ago, it should figure among the top few.

Veteran investors would remember the year in which the company IPOed, 1993. Remember, remember the Year of the Market Trader. The then-SES was in the middle of an unprecedented bull market where the STI jumped from 1400 to 2500 within the space of one year (a similar performance for the small caps; the Sesdaq was >100 then as well!); the bull run nowadays is nothing in comparison. Stocks were being floated at about 30 times earnings during this period. It was in this environment that Singtel, in accordance with the government's privatisation drive of state-owned companies, undertook its IPO. The size of the company is reflected in the fact that although it only IPOed ~10% of its shares (the balance retained in the hands of Temasek Holdings, the state investment fund, for control), it was, and is, the largest Singapore IPO ever.

The public offer was done via three tranches of Group A, B and C shares, with the first two reserved for Singapore citizens as "part of the Singapore Government's effort to share the nation’s wealth and to enlarge the base of share-owning Singaporeans" (quote). International investors had to subscribe for the "C" tranche, priced at $3.60 or a whopping 48X forecast PE. The "A" and "B" shares were priced at about half that price ($1.90). It was a great deal for locals, and about 1.3M Singaporeans subscribed (most using their CPF), giving Singapore the highest per-capita rate of share-ownership of any country in the world.

Years later, it turned out that the "stag" strategy would have been the way to go for the IPO subscribers. The "stag" strategy, basically, is sell the IPO shares on the first (or first few) days of the IPO. The stock sold at close to $4 for the rest of 1993, then slowly drifted downwards over the next few years as the bull run fizzled out, to below $3 in 1995, below $2 in 1998 during the Asian currency crisis, and then hitting rock bottom at ~$1.20 in 2003. At this point it would be unfair if I didn't point out that since the company paid out ~3-5 cents of dividend per year, the local IPO subscribers would not have lost out as they would have collected close to 40-50 cents dividend per share a decade after the 1993 IPO. However, the Tranche "C" (unprivileged) investors would probably have suffered a total return of negative 50%.

The annual dividend payout, although seemingly generous, actually amounted only to ~1.5% dividend yield in the first few post-IPO years; therein lay the problem: the IPO pricing had been set too high. In fact, from 1993 to 2000, the company experienced steady growth, from S$2.7B revenue and S$S$1.3B pre-tax profit in FY1993 to S$4.9B revenue and S$2.5B pre-tax profit in FY2000: a profit CAGR of ~10%, very respectable if one remembers that the Asian currency crisis and its after-effects was sandwiched between those years. The price decline during these years despite the profit growth was a classic case of earnings having to catch up with share price. Years later, Singtel chairman Koh Boon Hwee was to admit that the high pricing had made subsequent corporate moves difficult in several ways: (1)for SingTel's share price to make a meaningful move upward despite strong profit growth; (2) for Temasek Holdings to reduce its large majority stake in the company; (3)to use its stock for acquisitions because "most people felt it was valued way too high".

In the later parts of the 1990s, Singtel began actively sourcing for new acquisition targets for two reasons: a limited domestic base in Singapore, and probably more importantly, the looming liberalisation of the telecom industry which ultimately took place in April 2000 (accelerated due to the dot-com boom). Attempts to acquire TimedotCom (a telecommunications group) in Malaysia and famously, Cable & Wireless HKT in Hong Kong, failed due to concerns about its links to the Singapore government. Finally in 2001 Singtel managed to acquire Optus, the No.2 telco player in Australia, its biggest acquisition so far by a long way.

Unfortunately, that pushed the earnings back into the water just when it had risen adequately to fulfil the promise suggested by the 1993 IPO price (before the merger, it was trading at a reasonable ~16X trailing PE). Because of the heavy debt incurred as a result of the high price (50X PE!) paid for Optus, Singtel's domestic earnings were dragged down by interest payments and poor performance at Optus over the next few years, such that phenomenal revenue growth was accompanied by phenomenal decline in profits. That explains the continuing decline in share price during the new millenium despite telecommunications/utilities being the classical defensive industry.

There are several lessons from this episode. Firstly, from the 1993-2000 time segment, that valuation must be watched, despite the business holding enormous promise. Don't buy into a bull market at ridiculous valuations! Secondly, from the 2001-2003 time segment, beware of major acquisitions extracted at high prices and with huge leverage being taken for that purpose. Thirdly, beware companies in heavily regulated industries; be vigilant in watching government regulatory trends. The liberalisation of the telecommunication industry in 2000 was a nail in the coffin for Singtel's domestic market growth hopes; its monopoly position would forever be gone; pre-emptory action by shareholders to sell off would have enabled them to avoid the share price stagnation/carnage that followed.

(1) Article: A New Blue-Chip Is Headed For The ...
(2) Associated Press article 28 Aug 2001: SingTel IPO price too high, says chairman
(3) Singtel Investor Relations website
(4) FEER article 4 Oct 2001: Slow and steady at SingTel
(5) Fortune article 11 Jun 2001: SingTel's Trouble Down Under




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