Starhub announced their full year 2011 financial results. Overall, my take is that they got back to pre-iphone competition level of operations. I would not say it is spectacular but rather, the reasons operation wise, why we like Starhub is finally back.

Here are some of my takeaways:

1. Profitability
1. Gross profit 4th quarter grew by 15.3%. Considering the handset subsidies costs over the past 2 years, its good to see that growth is maintained.
2. Gross profit full year grew by 16.3%. Considering past 2 years of competitive landscape, its good to finally see growth overall instead of profit drawdowns year on year.
2. Business Segments
1. 4th quarter mobile revenue grew by 3.1% and full year mobile revenue grew by 3.1%. A note that mobile revenue is the biggest contributor to the top line.
2. 4th quarter Pay TV revenue grew by 7.5% while full year Pay TV fell by 4.9%. This is the only segment that shows negative growth owing to the loss of BPL. Here is where competition is intense and we do not yet have visibility how the new IDA rules on cross carrying of content will do to Starhub’s Pay TV.
3. 4th quarter and full year broadband grew by 2.7% and 2.4% respectively.
4. Fixed network grew by 1.5% overall.
5. We are seeing a 5% fall in pre-paid mobile revenue versus a 5% rise in post-paid mobile revenue. The ratio of pre-paid to post-paid revenue is 1:3.88.
6. Post-paid ARPU was S$76 for the quarter versus S$73 last year. Higher ARPU was due to higher subscription revenue from increasing mix of “SmartSurf” plans, which is their 3G voice and data plans.
7. In terms of voice calls to data usage, there is a 9% reduction in voice calls and a 16% rise in overall data usage, reflecting a shift towards data. This trend looks set to continue and had it not for the bundled plans, it will be difficult for the telecom to explain to end user why they still pay S$44 for a voice+data plan.
8. Post-paid churn have increased to 1.2% versus 1.1% last year. This is somewhat of a small concern as although it is relatively small, would indicate that given the release of the same set of iPhones and Android phones, consumers would prefer competitors more than Starhub.
9. Pay TV ARPU was lower year on year. However, churn remain constant. This shows that to retain customers, the margins are affected to offer more competitive packages.
10. Broadband ARPU was lower year on year as well.
11. Fixed Network Services was the surprise where they grew Data & Internet by 1% and Voice services 4% for the year. Data accounted for 5 times that of Voice.The higher take up was attributed to increase take-up for NBN services by retail service providers.
12. The higher voice services revenue was attributed to higher subscription of local voice services and increased interconnect revenue but offset by lower IDD revenue.
3. Business Costs
1. We are seeing a 22.8% rise on cost of equipment sold due to higher subsidies of smart devices. Particularly significant is the 68% rise in cost of equipment for the 4th quarter which looks to indicate that more smart devices are sold and greater subsidies are required. This will only get worse when LTE gets deployed next year and more subsidies are required to make people switch to LTE compliant handsets.
2. We are seeing a 6.8% rise in Staff costs and 8.5% rise in Marketing and Promotion costs versus a drastic reduction in Operating Lease, Repair and Maintenance and other expenses. Probably my gripe here is that costs are rising much faster than the added revenue.
4. Cash Flow Analysis
1. Operating Cash Flow was significantly lower due to higher inventories and receivables for the quarter. This come as a surprise but perhaps is an operation decision to hold more stocks.We will need to observe future operating cash flow for tell tale signs of stress in operational cash generation.
2. I was surprise by the high capital expenditure of 116 mil in 4th quarter versus the previous three quarters which add up to almost 120 mil. Last year this time the capex is also very high in the 4th quarter. Capex remains 10% of operating revenue inline with company full year guidance.
3. We were expecting much lower capex so this was against my very own estimates. It looks to follow the management capex guidelines of not more than 11% of operating revenue
4. Free cash flow was S$450 mil versus S$400 mil full year. This is greatly attributed to increase in operating cash flow due to higher depreciation and lower capital expenditure.
5. Dividend payout remains at S$343 mil for $0.20 dividend payout. This is higher than net profit but well within the free cash flow levels
6. Capital expenditure was S$246 mil versus S$277 mil of depreciation, showing a consistent replenishment of assets, thus Starhub do not run the risk of erosion of NAV.
7. Net debt repayment was S$143 mil versus S$90 mil last year. This shows management’s commitment to reduce debts
5. Debt Analysis
1. Net debt was S$483 mil versus S$568 mil last year. Management looks to continue to use excess free cash flow to pay down debts
2. Net debt to assets is at 31% which is at a comfortable level
3. Net debt to EBITDA is at 0.69 which is at a very healthy level, far lower than the 1.1 level management is targeting.
4. With a free cash flow of S$450 mil it also means that by not paying any dividends, Starhub can theoretically pay off their debts in 1.07 years.
6. Growth outlook for 2012
1. There will be a continued shift from voice to data
2. Content cost will remain high despite the new cross carry guidelines
3. Take up for NBN is set to continue but currently hampered by operational issues which are pending resolution with various parties.
4. Revenue growth is forecasted to grow in the low single digit range.
5. EBITDA margin as a percentage of service revenue is set to remain at 30%
6. Capex guidance is expected not to exceed 11% of operating revenue
7. Dividend payout to remain at 20 cents

Conclusion

I was somewhat disappointed that there isn’t much mentioned of their plans to differentiate from the competition. I written recently the future trend of telecoms in Singapore (read here) and it would be paramount that with a LTE and NBN pipe, Starhub provides the best content to shift subscribers or provide the best QOS.

Else they will end up in this endless lowest switching cost game.

My forecast of higher dividends looks set to miss since free cash flow is forecasted to be lower than S$450 mil this year and  capital expenditure will not significantly reduce.

Still you ask yourself whether you are contented with a currently yield of 7% for a service utility that people will continue to use for the foreseeable future.

Disclosure:Vested

I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

First REIT this evening announced their 4th quarter and full year 2011 results. Here are some take-aways

1. Net property income is climbing gradually: 13.0 mil > 13.1 > 13.47 > 13.77
2. Rental Income climbed in all regions, not just in Indonesia but also for their Singapore and Korea properties
3. Larger distribution this quarter similar to that of 3rd quarter, as part of the sale of Adam Road property. Total distribution investors will enjoy is 1.93 cents.
4. This years distribution is 7.01 cents. At 77 cents that is 9.01% yield this year.
5. Assets continue to increase in fair value.
6. Debt to property is 16%
7. Net Debt to Asset is only 9%
8. Indonesian property values have been rising compare against Singapore properties which are not doing that well.
9. Korea Hospital is freehold. Based on rental yield it seems the yield is only 4.9% which is rather low. Freehold is great but I don’t remember the property yield to be this low.
10. First REIT have first rights of refusal to Lippo Karawaci’s hospital pipeline. On top of this there is a slew of government measures aimed at making healthcare more affordable to Singaporeans. All these presents opportunity to First REIT
11. NAV of 80.5 cents > current share price of 77 cents

Excluding the special dividends from the sale of Adam Road, the distribution did not grow much. I wonder whether that will be a trend. There are rental escalation build into it so we would have expected more.

Then again I may be over analyzing since they sold Adam Road and added a Korea Hospital yet was able to maintain the rental distribution.

Will be expecting much dividends as this is currently my largest holding.

I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

We talk a lot of telecom stocks at Investment Moats, and if you would like to know what I thought about them and their direction take a look at the following articles

1. Primer to telecom investing: Singtel, M1, Starhub
2. Starhub, M1 and Singtel’s existing telecom business model approaches end of life
3. How the smartphone revolution will affect M1, Starhub and Singtel
4. Smartphone revolution causing back hual problems
5. Telecom operators in US moves to tiered pricing
6. The rise of VOIP iPhone App Viber
7. Starhub indicates it will review buffet price plans for tiered plans

Now I thought its time we take a peak again at the future to see if its still rosy for the telecom stocks going forward.

Near term economic moat

Demand

In the near term, telecom stocks should do pretty well. Mobile communication have become a utility and in Singapore perhaps data centric communication have become of a utility for many.

Singapore have the highest mobile smartphone penetration rate in the world. If you look at the amount of screen starers in MRT and bus you will realise how much Singaporean’s enjoy their smartphone data lifestyle.

The churn to cancel data looks very low which means that the telecom stocks can maintain their customer base for data.

For this to happen, mobile data phone plans need to remain at an affordable range.

More and more working adults are carrying more than one mobile plans. Specifically mobile data broadband. Else they are going on dual sim. This is likely to increase the amount of ARPU per customer.

Tiered Pricing

Starhub’s indication to move into tiered pricing should help better price differentiate their customer base and monetize usage. This should translate to higher revenues. The problem with the current all you can eat buffet plan is that the telecom companies cannot charge customers for higher usage.

Subsidies

Subsidies competition with other telecom companies are likely to remain which means we should not see this cost going down.

This year may see the roll out of LTE for all three telecoms and in that case expenditure may increase due to subsidies to improve adoption through subsidizing of LTE handsets.

Capital Expenditure

Infrastructure costs should remain constant or less. Judging by Starhub being able to save 30% of capital expenditure and operating expenditure (see here) compare to last time means that latest technology is cheaper and provide the necessary data requirements needed by consumers.

With an aggressive depreciation of older equipment, it means deprecation is higher than capital expenditure.

Regulation

Regulation conditions remain controlled. The last big policy change was the cross selling of all Pay TV content. This should reduce the aggressive bidding of content.

The question is whether IDA will force the telecom companies from reducing their phone plan prices. Voice on LTE and 3G are not as expensive cost wise compare to last time.

With the technology now, the telecom companies may enjoy expanding margins. If voice is so cheap and no one uses SMS, shouldn’t your price plans be reduced? I honestly see IDA forcing them to reduce the prices and thus ARPU can be maintained.

The downside could be if IDA tells the telecom companies they cannot charge $5 for caller ID and $10 for dual sim,

Competition

Competition wlll be intense as always. In fact at current quality of service, product offering and prices, I do not see a difference between the three telecom companies.

One telecom company may choose to reduce its prices due to lower operation costs. This would spark off a price war down to the lowest price based on Nash equilibrium.

The telecom companies are likely not going to but tiered pricing will mean the three telecom companies coming up with different price plans each that make it difficult for you to compare, somewhat like what insurance companies do.

Each companies are offering value added software solutions but I reckon it does not differentiate them because they do not provide huge value add.

Who will win?

Its difficult to differentiate between the 3 even now, but I believe Singtel is the current winner in market share due to their network having a better coverage which provides a better quality of service.

However, Starhub remains nimble and provides the best free cash flow with Singtel following closely due to their lower capital expenditure cost.

Future telecom trend drivers

Multiple Technology Offering a Quality Data Pipe

We can’t tell what other wireless technology is going to be dominant after HSPDA+/LTE  but do not discount other mediums coming into the picture.

Traditional mobile telephony and SMS is going to die soon and what consumers see is who can provide me with the best “data pipe” to access the internet or make a call to communicate.

Be it WIFI, broadband, WIMAX, LTE/3G, FEMTOCELL, the telecom operators can take advantage of technology and integrate them into a comprehensive data pipe.

We all talked about the backhaul problems with growing data demand from HD movie streaming on the go, one area the telecom operators can look at is to use FEMTOCELL to reduce the load and move it via broadband fibre optics.

Customers will judge by who gives the best coverage for the lowest dollar all else being equal.

Possibility: Medium. Singapore is small, and the telecom operators may be able to upgrade their infrastructure to be able to handle a dense small area such that they do not need supplementary technology like FEMTOCELL and integrated WIFI.

The competition from cheap new entrants to kill margins

As technology gets sophisticated another problem faced by the 3 telecom companies is a 4th player. For a small country like Singapore, what used to be pretty high cost to set up fibres and all may be circumvented by advancement in WIMAX and other wireless radio technology that it becomes easy for them to set it up.

We take the case of FREE.fr which through its fibre broadband network and set-top boxes with WIFI and FEMTOCELL is able to offer unlimited voice calls, SMS, data at half the incumbent’s costs [full article]:

By offering a flat-rate, high-speed Internet connection for 30 euros ($43) a month. That gives Free.fr’s three million subscribers a connection speed of roughly 28 megabits per second over DSL, free IPTV (and a free set-top box), a free Wi-Fi hub, and unlimited voice calls to some 70 countries.

“We are a broadband service provider,” was his matter-of-fact reply. “Everything else — from voice to IPTV to storage – is just a feature that rides on this data service.” For the rest of the telecom industry, long addicted to metered minutes and billable items, this is rebellious thinking

This is game changing and making the incumbents sit up. The incumbents who is living on metered calls and SMS have a monster on their hands. How do they competed? Free.fr’s network is going to grow if they don’t do something like this.

This is made possible through shrewd innovative thinking:

“Since it is our own set-top box, we can innovate around it,” he says. “In the U.S., they buy their set-top boxes from other providers.” That’s a mistake and lost opportunity, Niel says and proceeds to outline how pivotal these set-top boxes are for his company and its future.

For example, Free.fr used the set-top box for automatically sharing a portion of one’s broadband connection via Wi-Fi with other Free.fr customers. Over five million set-top boxes means Free.fr has a free Wi-Fi cloud enveloping major cities such as Paris. Even when away from home, you can easily get broadband instead of resorting to an expensive 3G network.

This Free.Fr free Wi-Fi network is going to play a pivotal role in the soon-to-be-launched service, which will be using 42 Mbps HSPA+ technology. The company has built a network of 15,000 macrocells, but those 5 million “nano cells” are going to be the key difference maker, Niel points out.

Free.fr’s newer set-top boxes will have built-in femtocells. On top of that, Free is going to be beefing up its macrocells with high-capacity fiber connections being fed by Iliad’s dark fiber. And when the time comes, he is going to embrace LTE and include that in his network as well. “We will go to wide area network (3G and 2.5G) when we are not in Wi-Fi coverage,” he tells me. (I got a sneaking suspicion Free would be pushing iPhones into the market pretty heavily.) If they pull it off, it’s going to be pretty spectacular and once again, show what the telecom of tomorrow looks like.

The worse possible impact to the incumbent is that

1. Revenue and market share down
2. ARPU halved
3. Capital Expenditure needs to rise

It will just kill those legacy telecom companies

Meanwhile, Les Echos reports that other French operators were “shocked and astonished” at the aggressiveness of their pricing, and quotes Rudolf van der Berg at the OECD pointing out that Free’s service is more open to the Internet than the Dutch operators who are covered by a net-neutrality law. (How many other mobile operators provide a full USENET feed?)

The initial upshot has basically been all about price, though - Fitch Ratings warns that French operators are likely to see their margins drastically reduced, and indeed all three existing mobile operators and several of the MVNOs have already cut prices, although they are trying to hold the line on the top of the price range while matching Free’s prices on their discount offers. That makes sense unless Free users are mostly early adopters (like, ah, Stéphane Richard thinks).

Possibility: Medium. I think the key for Free.fr to be so successful was their acquisition of dark fiber in France. In Singapore, the whole island have been wired by Singtel which have relinquish the fibre assets to the NBN OpCo. There is no monopolization of fibre optics. Without that form of exclusivity, a new entrant or any of the telco can provide this level of deployment exclusively.

They can however provide a good quality data pipe and charge a low fee to under cut the rest. In that scenario, the rest will have the capability to meet that low price. It becomes a lose lose situation for all the telecoms.

Commodity data pipes – why should I switch?

The previous two points builds to this current point: Given that in the future, digital broadband set top boxes are standardize and fibre optics are available to all, and that technology is able to cover the island with LTE wireless data access well, what is the difference between the 3 telecom operators?

If your answer is that each telecom would value add to their customers by providing end user services and apps, then my answer to you is that not many would subscribe or think that it is a differentiating factor.

The content aspect is actually provided by the major cloud or content players such as Amazon, Apple, Google, Facebook.

The major payment solutions are provided by banks,Paypal, Mastercard and Visa.

The telecoms are just pipes.Even now with all the regulations from IDA, we can’t really point to the difference between the 3 telecoms. The biggest differences being quality of service.

You cannot charge a good premium if you cannot differentiate and this is a big problem for telecoms. There is a high threat that a newcomer will come in and undercut bringing everyone to a Nash equilibrium low price.

Possibility: Very High. It is already happening

Telecom not being able to outdo Disruptors Apple, Google, Amazon and Facebook

Supported by hundreds of thousands of software developers, Apple, Google and Facebook’s platforms are fuelling innovation in consumer and, increasingly, business services on both the fixed and mobile Internet. Amazon has set the benchmark for online retailing and cloud computing services, while Skype is reinventing telephony, using IP technology to provide compelling new functionality and features, as well as low-cost calls.

On their current trajectory, these five companies are set to suck much of the value out of the telecoms services market, substituting relatively expensive and traditional voice and messaging services with low-cost, feature-rich alternatives and leaving telcos simply providing data connectivity. At the same time, Apple, Amazon, Google and Facebook have become major conduits for software applications, games, music and other digital content, rewriting the rules of engagement for the media industry.

In a Telco2.0 online survey of industry executives conducted in September 2011, respondents said they expect Apple, Google, Facebook and Skype together to have a major impact on telcos’ voice and messaging revenues in the next three to five years . Although these declines will be partially compensated for by rising revenues from mobile data services, the respondents in the survey anticipate that telcos will see a major rise in data carriage costs (see Figure 15 – The potential combined impact of the disruptors on telcos’ core services).

Unlike telcos, the disruptors are generally growing quickly and are under little, or no, pressure from shareholders to pay dividends. That means they can accumulate large war chests and reinvest their profits in new staff, R&D, more data centres and acquisitions without any major constraints. Investors’ confidence and trust enables the disruptors to spend money freely, keep innovating and outflank dividend-paying telcos, media companies and telecoms equipment suppliers.

By contrast, investors generally don’t expect telcos to reinvest all their profits in their businesses, as they don’t believe telcos can earn a sufficiently high return on capital. Figure 16 shows the dividend yields of the leading telcos (marked in blue). Of the disruptors, only Microsoft (marked in green) pays a dividend to shareholders.

Source: Google Finance 2/9/2011

Reducing Barriers – SPH, SingPost and Vodafone

The lower technology cost and technology innovation may bring about other entrants.

SPH and SingPost have their own crumbling business models, they are looking at creating a content pipe as well, similar to the telecoms.

I suspect we may see a merger of SPH with Starhub or M1 due to the synergy there. Starhub and M1 lack the content people want, SPH have a large content and they are an advertising business. This can be a marriage make in heaven.

Possibility: Medium.

Telecom as a payment service provider versus MasterCard, Visa, Apple, Google

We talked about ways to differentiate but moving into payment is more about leveraging on the close relationship with the end users.

Instead of going into banks and viewing on the computer what is it that we have on ourselves more than anything else? Our smartphone.

The smartphone have become the platform to do internet banking at DBS, OCBC, but this is more than that.

I believe what the telecom operators will be looking at is leveraging on their already large customer base to become their payment solutions thereby earning small transaction fees by going through them.

The obvious answer is that Telcos charge customers a flat fee for the privilege of being their customers  – for managing their bills, providing call centers and guaranteeing them a unique telephone number.   If Visa relied on the same, which by analogy would make sense (it provides bills, call centers and “unique” credit cards) , its business model would collapse. Visa needs to make money by providing payment services to merchants and banks – services to the customer is just the channel.

So the obvious way for Telcos to exploit their relationship with their customers is to be the same – by becoming a billing and payment provider.  Instead of the credit card with chip ‘n’ pin – they have the Phone Number + SIM.

- Telco Professionals.

In the last five months there has been a wave of billing partnerships between device and/or platform vendor app stores and telcos – both in mature and emerging markets. Examples include RIM/Blackberry (with Vodafone), Microsoft (Orange), Nokia (Reliance, UK operators), Google/Android (AT&T).

Banks in Canada and South Africa have applied for banking license. Your Singtel, Starhub and M1 billing is synonymous with credit facilities provided by banks in that you make use of the services and pay at the end of the month.

VISA, Mastercard does the service of managing credit and debit transactions between merchants (bricks and mortar or software)

Apple and Google app stores provide the content infrastructure content providers demanded which then leverage on VISA and Mastercard.

Google itself is playing this smartphone payment game with Google Wallet, like Square and Paypal. They are essentially Peer to Peer transaction solution leveraging on internet as a space and smartphone as a transaction medium. But they still have a bank or VISA backend. Take a look at this comparison of Google Wallet vs Square vs Paypal charges, and that is why the telcos are trying to edge in. The money in payment is there.

Where is the pie for the telecom operators? For one thing pre-paid is a huge opportunity there. Some may not know that in many countries such as Thailand and India, most of the population is still on pre-paid.

In 2008 about 17% of the US mobile subscriber base were on prepaid deals, but since the GFC (Global Financial Crisis) approximately 65% of net new subscribers are prepaid users. In emerging markets like India and China 90%+ of the subscriber base is prepaid, and the same counts for sub-Saharan Africa, and broadly across Eastern Europe and Asia. So what does this have to do with banking?

Prepaid subscribers for mobile phones generally speaking are more likely to be at the lower end of the scale for retail banking (less profitable, underbanked) or even in the unbanked segments. These are customers who don’t have extensive multi-bank relationships, and who increasingly are moving to products like prepaid debit cards to facilitate their day-to-day banking needs.

So guess what happens when you combine a prepaid debit card with a prepaid mobile phone? It’s a marriage made in heaven! What’s the difference between making a telephone call, an ATM withdrawal or a debit card transaction at a merchant – they are all just transactions from a value store.

- finextra.

The biggest benefactor of this will be Singtel out of the 3 local telecoms.

The problem for local telecoms is that their own app store dreams are either in dream state or not working. People would rather use Apple and Google’s app store which uses Mastercard and VISA mainly.

As long as the local content doesn’t get attractive, I believe this payment revenue stream will not take off.

The company’s digital services unit, headed by Nordic and broadcast businesses chief Kristin Skogen Lund, announced a deal with Google in November to let its customers in 11 countries pay for Android apps on their phone bills, and will also have its own shelf in Android market. More deals will follow, Baksaas said.

- Telenor.

The number of announced partnerships suggests that telcos clearly find the potential revenues from such deals attractive. It would be an easy, if not exactly a large, revenue stream for individual operators, which requires little investment. But providing billing to third party app stores raises questions about the telco’s own app store strategies. Arguably, such partnerships boost third party app store’s attractiveness and convenience at the expense of telcos’, particularly as many (e.g. Apple, Google) have far greater number of applications, and higher download volumes. We suspect there is a hard calculation at play here. The billing revenues from such deals are on the table today, while fierce downward pressure on ARPU and revenue growth means that there will always be telcos keen to go down this route. Hence, in effect this is no different to the classic wholesale/retail strategy dilemma that telcos have had to face in other areas (e.g. MVNOs).

All said, the rapid acceleration of smartphone penetration, combined with the dominance of the handset and platform vendors app stores, and the slow progress of cross-telco app store initiatives (e.g. WAC) will continue to put telco content strategies under pressure. By making paying for apps on other app stores more convenient, this move will add to this pressure, regardless of whether telcos acknowledge the fact either internally or externally. In effect, third party billing could be counter-productive to realizing telcos own content provider dreams – but it may well be a nice and more profitable improvement on a pure ‘bit pipe’ nightmare.

- OVUM.

Telecom as Identification Managers

The other thing that shapes the future for telecom is identity management. Think about this: Your phone number is becoming like an ID. This ID is gotten from a telecom operator after certain verification of your credentials. The ID takes the form of a SIM card.

What the telecom can perform is authenticate and verify credentials between your ID with the government and various services that requires it. We are not talking about an application but a build in protocol into the telecom’s 3G / LTE network to provide this form of authentication and credentials verifications.

The smartphone is a multi input device that may in the future provide multi factor authentication that is required.

Possibility: Medium to Low. The possibility of ID management is high, but why I say low is that it is likely to be taken up by the regulators and the government to provide the standardization.

Without standardization, this will be the value add that telecom can provide. This will differentiate one telecom from another.

But the main reason you will want to authenticate is to make use of a myriad of local and online services and to do that you have to follow a certain ID management standard. If you follow a certain ID management standard, your competing telecom can just do the same thing and you end up back to square one.

Conclusion

The future outlook for Singapore telecom as of now looks as if differentiation is a failure.

1. They fight on giving subsidies, freebies instead of lowering their prices
2. Their cloud solution does not seem to have become the strategic drivers people have hope for but perhaps its still early stage
3. They boost mediocre quality of service when I spoke to friends from different carriers
4. They all boost lackluster customer service with possibly M1 being better there.

In the end, failure to differentiate makes them a “data pipe”. You will likely go with the cheapest and best QOS pipe.  In the end they become like power generation, high capex and regulated profits. They may still provide yields, though I don’t see the yield growing like Kingsmen, Boustead or Keppel.

If IDA or new entrants doesn’t force them I believe they will not under cut each other. Status Quo. If something like Free.fr starts happening here or IDA looks over at overseas markets and see the 3 of them not bringing down prices you can see ARPU hit.

The margins will depend on how well the 3 telecom can optimize their infra, capex versus providing adequate to good quality of service. At the moment Starhub looks to be doing this well. Maintaining the margins would mean maintaining the free cash flow.

I think we may see Starhub or M1 taking up the mobile payment route by applying for banking license. They may be merge with SPH because they have the same issues and could very well help each other or hug each other to cry.

As usual, I am not an expert in this field and would be interested to hear you guys opinion on this matter.

Do you guys see other opportunities or threats?

I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

Lee King Fuei manages the Schroders’ Asian Equity Yield fund and focuses on dividend investing. Here are some of his insights gain from researching on dividend investing in the latest issue of The Edge:

1. When he realize that his cash rich companies paying out good dividends are underperforming, he carried out a research to see whether there is a paradigm shift so that Asian dividend investing doesn’t work any more. What he found out is that this strategy that focus on good quality companies doesn’t work that well during bubble built up. This may give a good indication towards a market top in the future.
1. Further example during the Asian Financial Crisis in late 1990s, high-dividend stocks underperformed in the months preceded.
2. This was the case before the dot com bust in 2000 as well.
2. In the aftermath of a crisis, high-dividend stocks tend to outperform for several years to which he attributes strongly to behavioral finance.
3. He believes currently the fund is heading towards another post-crisis outperformance.
4. Here is why he thinks investors should focus on dividends:
1. High Dividend Stocks in Asia are also relatively cheap now
2. Asia will grow more than US or Europe
3. Asian stocks offer the highest dividend yields other than Europe, which are under pressured
4. Currently an unusual case of high dividend yields but low opportunity costs due to importing low interest rates from US. He cites this is a once in a life time opportunity.
5. As corporate governance standards in Asia are generally weak, dividends are strong indicator of the underlying cash-generating strength of the company’s business.
6. King Fuei in his research identified that there is a positive correlation between dividend payouts and subsequent earnings growth.
7. When the company pays a strong dividend, it strongly signals that they know the cash flow subsequently can sustain it.
5. King Fuei differentiates dividend stocks into two category
1. Dividend Cows -  Large companies, large market share, steady cash flows. Examples DiGi.com, Telstra Corp, Taiwan Mobile and Fortune REIT
1. Perform best during down markets
2. Safe Haven
2. Dividend Growers – A track record for paying dividends yet at the same time see growth in earnings. Dividend per share will grow. Examples Jardine Strategic and Jardine Matheson.
6. He likes stocks that deal with Asian consumption and properties. This is because as people get richer one of the things they will consume more is properties. He likes Swire Pacific and UOL Group.
7. He says that you need both Dividend Growers and Dividend Cows. The two complement each other to tide you through bull and bear markets.

That is certainly a good article I feel. I have a problem categorizing the stocks in my stock portfolio tracker, I really like his terms, perhaps I shall give my dividend stocks with different characteristics the same kind of categorization.

What do you guys think? How many dividend growers do you have and how many dividend cows do you have?

I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

You can view all the factsheets on my Google Spreadsheet here [SGX Singapore Stocks Factsheet >>]

Keppel Corp Price 11 Years

Keppel Corp have been the favorite stocks for a lot of rich people or people aspiring to be rich. It is one of the more prominent stocks that people that do not look at the stock market everyday would come across.

Business wise, it is pretty diversified across ship building, repair and rig building, properties and oil and gas infrastructure. All of which is what have been driving the Singapore economy and what have been in demand for the past 10 years.

It is no surprise that the price movement of this blue chip stocks mirrors the general movement of the STI.

Speculators have been handsomely rewarded had you picked this up during the recession in 2001-2003 or 2009.

The most significant drop in 2007 was the result of a 2 for 1 stock split and factoring that, the low of 2009 should have been $8 instead of $4.

Keppel Corp’s uneven cash distributions

(Click to view larger image)

Had you held Keppel since 2001 you would have done pretty well despite going through 2 bull runs and a bear run.

Purchasing at a low of $3.26 would have yielded you an unrealized gain of 534.36% and total dividends of 202.73%.Annualized unrealized gain is 18% and dividend collected is 10%.

Not as spectacular as Noble’s 11 year price movement, but nevertheless I wouldn’t be sad about this investment at all. It has a good yield and capital growth.

One thing you would notice is that the distribution from Keppel can be very uneven. As a lot of their Rig building and property related business is very lumpy in profits, their dividend distribution ends up being lumpy.

This is why a lot of dividend hungry folks like me don’t go for stocks like this. However, as stated in the Noble’s article, what matters is the earnings growth and Keppel was powered by 2 very strong trends taking place from 2001-2011: Property and Oil & Gas. The return turned out to be much better than any REITs or dividend stocks that pays predictable returns.

If we tabulate the annual returns, there are only 2 lumpy periods (2001 and 2008). Else Keppel have been steadily raising their dividends every year. Your yield on cost have been climbing at a rate of roughly 6% per year.

What if you overbought it?

Now everyone would say that this is only a good investment if you bought it in deep recession. I think everyone would have been afraid now to hold a stock if they did not bought at the “right” price.

Ultimately what made Keppel a good company to me was this

1. Management rode the trend on 2 major trends
2. Their profits despite what the stock market did, continue to grow
3. The management is shareholder friendly in that they return increasing payouts at a sensible level to investors

Price is what you pay for value is what you get. If you pay the equivalent of $18 (there was a split in 2007) which is about todays price of $9, your returns in 11 years would still be 51%. The majority of the returns (36%) coming from dividends.

Make a copy of my spreadsheet and try this: change the original purchase price and see how much you would have to overpay in order for you to lose money in 11 years.

I did that, and turns out you need to buy Keppel Corp at $27 in order for you to start losing money.

Conclusion

I guess for me this exercise shows a few things

1. Your portfolio will benefit immensely by holding 1 to 2 stocks that benefit from future growth.
2. Do not always worry that dividends are lumpy. Worry more about future free cash flow projections based on cash flow growth. Estimate or project the likely dividend returns for the next 10 years.
3. Certain stocks are share holder friendly. The dividend return acts as protection against future management or business incompetence.

I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

Do read these articles if you haven’t:

1. Primer to telecom investing: Singtel, M1, Starhub
2. Starhub, M1 and Singtel’s existing telecom business model approaches end of life
3. How the smartphone revolution will affect M1, Starhub and Singtel
4. Smartphone revolution causing back hual problems
5. Telecom operators in US moves to tiered pricing
6. The rise of VOIP iPhone App Viber

This week we finally got more information on how 4G plans is going to be in Singapore. For Singtel, they will be offering lower data cap in LTE plans. Eventually they will remove 3G all together.

• First stage pricing: New 4G plan will bundle 10GB of LTE data along with existing 50GB of 3G data for an additional $10 on top of $59.90
• Second stage: Upon the LTE roll-out reaching 80% of users by end 2012, 50GB 3G data cap will shrink for new subscribers of the plan and for existing subscribers on contract expiry.
• Third stage: When LTE roll out reaches 95% by 1Q 2013, 3G data cap may be dropped altogether, leaving new subscribers with 10GB of LTE data.

Singtel said that 11% of users account for 60% of data traffic and tiered pricing is specifically to charge these group of users more so as to align to capital expenditure as these guys wear out the infrastructure more than the rest of us.

Overall, I see the 3 telcos all doing that. The take up will be slow since on average not many will see the upside of this. I wonder if their projected dates will come to fruitarian.

How it will affect telco profitability

Much will depend on the rollout

1. Higher subsidies for 4G handset will increase cost
2. Tiered pricing and no reduction in price plan will increase revenue
3. 4G LTE ready infrastructure are more cost effective
4. Singapore have the world’s highest smartphone penetration rates

I see an upside for the telcos in 2012-2013 definitely.

The telcos’ crusade against virtually unlimited mobile data usage might soon be upon 3G shores. StarHub and SingTel are taking a good look at revising their 3G price plans, the two telcos told BT yesterday.

StarHub said that it may ‘review current (3G) pricing plans and consider introducing usage-based data pricing’, in response to BT’s queries.

This, it said, was ‘to ensure optimal network quality for our customers’. Currently, StarHub has three mobile broadband modem plans that offer unlimited data allowances. It also caps the local data usage bill at $30 a month for its mobile phone subscribers.

When it launches its own Long Term Evolution (LTE) – or 4G – network next year, it will not offer an unlimited data option, it said.

SingTel will be reviewing its 3G price plans, which include its mobile broadband plans that carry a data usage allowance of 50 gigabytes (GB).

This comes two days after it moved to start weaning high data-usage consumers off generous 3G data caps with a new 4G pricing structure.

By 2013, when 95 per cent of its users have access to the 4G network, new 4G data subscribers will have to make do with a 10GB cap on data, paying for the additional data that they use.

SingTel also revealed that 11 per cent of its 3G subscribers on dongles and tablets account for a staggering 60 per cent of data traffic.

‘It’s unsustainable and when you grow it, it becomes a challenge,’ said Yuen Kuan Moon, SingTel executive vice-president, digital consumer group.

StarHub and M1 did not reveal their own data figures, but industry observers believe the usage patterns are similar to SingTel’s.

M1 is staying tight- lipped on both its existing 3G price plans and approach to pricing LTE usage next year.

‘We regularly review all our service offerings to ensure they are compelling and competitive,’ its spokesman told BT.

It has the same narrow view of unlimited data usage, however. ‘Mobile network resources are limited, and the experience of the majority of customers should not be adversely affected by a minority of customers who regularly consume large amounts of data.’

While SingTel’s new 4G service currently applies only to dongle modems, StarHub’s review of its 3G price plan could apply across several devices – dongles, smartphones and tablets.

Analysts have pointed out for a while that the real battle for average revenue per user will be fought not over the dongle platform, but on smartphones and tablets, where increasing data usage is cannibalising lucrative voice calls and SMSes.

I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

Here is David Rosenberg’s advice for the turbulent 2012: Stick to safe money management strategies that focus on income. They are defensive and cushion volatility.

1. Focus on safe yield
2. Dividend equities and preferreds
3. Low debt/equity and High liquid asset ratios
4. Oil and Gas Royalties and REITs
5. Low fixed costs and high variable costs, oligopolistic
6. Alternative Assets
7. Precious Metals

Strategies – SIRP (Safety and Income at a Reasonable Price) Deflationary Environment – David Rosenberg

I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

The fall out from the K-REIT’s handling of the OFC purchase continues. There are a lot of debates on the blogosphere regarding the article published by Ms Teh previously. [Article here >>]

The fact is that She wasn’t the first one raising this. Independent assessors have highlighted this and most recently CFA Institute have an article titled Asia-Pacific REITs – Building Trust through Better REIT Governance.

In that article it highlights some key recommendations:

1. REIT Management to be internally managed rather than outsourced
2. Independent board of directors subject to election and removal by unit holders
3. Annual General meetings for REITs to afford unitholders opportunity to meet and query REIT management.
4. Approval by Independent unit holders of related party transactions.
5. A limit on majority unit holder positions of 50% of the issued units, to better align interests and preserve minority unit holder tax pass-through benefits.

You can read the full article here (45 page):

20110201 – Asia Pacific REITs – Building Trust Through Better REIT Governance – CFA Institute

I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

DBS Vickers came up with an extensive 40 page report this week. The report is generally inline with my estimation on cash flow and dividend payout, which is a good thing. However, my figures are much more conservative.

20111128 – MIIF – DBS Vickers

I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

My take? About time. I first got to know about this when my friend passed me this damning analysis from an independent analysis on the REIT scene in Singapore. Back then (3 years ago), the analyst raised the same thing about Singapore REITs

1. Trustee Fees, Management Fees and Sales Fees means that it doesn’t matter how much cash flow the REIT produce for investors, they still make money.
2. The sponsors have a great incentive to dump assets in their REITs. It’s a win win for them.

Ms Teh  Hooi Leng had an article today in Business Times that took a look at all cash calls of the REITs listed in Singapore. For the full article you can read them for free at night at the Business Times [Article here >>]

Here’s the table in the article