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Should you be buying SingTel?

Australia’s second-to-last mobile carrier Optus, owned by Singapore Telecommunications (ASX: SGT), says customer service and excessive fees will make or break the domestic telco market.

SingTel-Optus chief executive Kevin Russell says the company is halfway through its three-year strategy of network and brand recovery but says it will start growing its customer base in early 2014. Despite slowly bleeding a small percentage of its mobile customers in recent months, Mr Russell says the company’s strategy will start to deliver in coming years and investors should be patient.

“We have to strengthen our network; we’re halfway through that and I think we’ll be in a very strong place by February/March 2015.” Mr Russell was quoted as saying in The Australian Financial Review.”[Telstra’s] brand differentiation is network leadership while ours has got to be… how we have the best customer experience in the marketplace.”

Mr Russell says Optus is not interested in beating Telstra (ASX: TLS) in terms of sales or customer numbers but will make beneficial investments that will reap dividends for years to come. “If Telstra wants to continue to throw out large amounts of money for marginal gains, we won’t follow them there.”

However the company’s recent investment in the 700MHz spectrum, which has been occupied by analog television channels, will put Optus’ network on comparable terms with Telstra’s by 2015. “We have a clear view to where we’re going to be in three years,” said Mr Russell.

Long-term sustainable growth begs the question: should investors start buying SingTel shares?

With the obvious saturation of the domestic mobile market, it has to make investors wonder where growth will present itself. Goldman Sach’s analyst Raymond Tong says growth will come from revenue per user rather than growth in the number of users, meaning customers will now be using their mobile devices to do more things like downloading, browsing the internet, emailing and talking – driving data revenue higher.

A legacy left behind

For years, mobile providers have charged extremely high prices for little customer benefit. This has now changed. No longer will customers, who can pay hundreds of dollar per month on phone bills, put up with poor customer service and excessive charges.

Recently Optus’ customer service and “My Plan” products have taken aim at excessive charges in order to differentiate themselves from closest rivals Vodafone and Telstra.

Despite the obvious advantages to customer retention however, offering more for less takes a toll on margins. Since 2005, SingTel’s Net Profit Margin has dropped from 28.5% to 19.8% whilst revenues have grown from $9.8 billion to $14 billion.

In SingTel’s news release for the second quarter to 30 September 2013, the company said its Australian revenues fell as a result of its My Plan offering, “Revenue declined 6% to A$1.73 billion due to slowing mobile revenue from mandated reductions in termination rates and service credits associated with device repayment plans. Strong customer signups for My Plan, designed to remove bill shock, led to increased data usage.”

Valuation

Despite slowing growth and declining margins, it seems investors have faith in the telco’s long-term strategy. SingTel’s average annual price/earnings ratio (since 2005) is 12.9, yet the company currently trades on trailing earnings around 15.

Morningstar are predicting solid earnings growth in coming years, likely the result of the company’s growing operations in Asia. Although the company’s primary operations are in Australia and Singapore, it has a number of strategic investments in regional mobile operators in Indonesia, the Phillipines, Thailand and Bangladesh. As of 30 June 2013 the group served 477 million mobile customers.

Foolish takeaway

Despite slowing growth here in Australia, it seems investors are still finding room for SingTel in their portfolios, pushing its share price up 28% in the past 12 months. However management have forecasted group revenue to “decline by mid single digit level” in FY14 and although it may be an ok long term play for investors, in this Fool’s opinion, the ASX is dishing up more appetising telecommunications stocks.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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