War Among the Titans

This article contains PART of my 1st Scorecard Newsletter written on 22 Aug 2018 for my Moat Scorecard subscribers. 

This is the 1st write up of the Scorecard Newsletter just for you, as a subscriber. 

This write up will comes with full disclosure on the companies that I will be discussing, even if they are in my portfolio. Do note that this write up will be reproduced on TUB Investing Blog 1 month later without full disclosure.

Before I start, I like to discuss about the consequences that occurred during the Turkey-US crisis. 

Basically, market went down quite drastically and it caught quite us by surprise. This signifies the volatility of the current market – a simple discussion between countries can result in multiple ripples globally. 

This is most probably the Nth time I had said it – as a retail investor, we need to invest in a strong fundamental company to be able to avoid these ripple effect. Companies with strong moat will have strong fundamentals. With strong fundamental, companies will be able to avoid these ripple effects. But if a “wave” comes along, regardless of its fundamentals, no company will be able to avoid that. But fundamentally strong companies will most probably be able to recover faster.

Anyway back to the main topic…

For this write up, I will be writing about the Moat of the Telecommunications companies (aka Telco) listed in SGX – Singtel, Starhub and M1. 

Once again, let me emphasize that Moats are referred to as competitive advantages a business has over its competitors in order to protect its long-term margins.

This also has something to do with the Big Ideas Investing Theory strategy I came up lately. I tend to look for moats within these Big Ideas. Because for these Big Ideas, I intend to keep for a longer period of time, and also to expect their margins and returns to increase over time.

I refer to a quote by Robert Vinall - "The vocabulary of moat is international.  There are basically seven moats the world over: brand, switching cost, regulation, patents, cost advantage, network effect, and culture. In a great business you can spot them a mile off.  If you are not sure what a company's moat is then normally it does not have one or at least not a wide one."

Although slightly different from the 5 different moats (Intangible Assets, Switching Cost, Network Effect, Cost Advantage, Efficient Scale) stated on the net, but I think that Robert Vinall had just broken down the moats more detailly into 7 different versions.

So why did I choose Telcos for the 1st write up?

This is because I assume that any investor will have owned one of the Telcos in their past or current portfolio. Furthermore, these 3 companies have quite a high moat score.

Based on the 7 different kinds of moats described by Robert Vinall – brand, switching cost, regulation, patents, cost advantage, network effect, and culture – I could potentially identify at least 2 moats that each Telco have.

1. Switching Cost – This is easy to identify with. Customers of the Telcos have a high switching cost as they have to sign at least a 1 year plan with a Telco in order to use their services. After signing on to a plan, a customer will need to pay an high one-time fee in order to exit a relationship with the Telco. Even if you have completed your contract, switching Telcos will be hard if you want to retain your phone number. Furthermore, there are always extra freebies to influence existing customers to re-contract with the Telco.

2. Regulation – Prior to opening up to the 4th Telco (TPG) to enter the Singapore Market, the Telcos were protected from competition by the Singapore Government. If any customer wants to have a mobile phone or to use data on the go, they will need to sign up with either 1 of them. 

Nevertheless, even with Moats, Telcos share price have came down significantly since Dec 2016 when TPG won the bid to be the 4th Telco in Singapore. The downward spiral of the share prices occurred, even though TPG has yet to rolled out any plans and require at least another 1.5 years before they can officially operate in Singapore.

Just looked at the change in Share Price below for Singtel, Starhub and M1:

Furthermore, we also must not forget the other competition from the MVNOs – especially in my opinion, MyRepublic and Circle Life.

At this point I like to highlight another quote from another famous investor, Mohnish Pabrai, stating, “Even businesses with durable moats don’t last forever”.

With existing competition from MVNOs, it is important to review the changes in the revenue and net profit of the Telcos for the last 2 years in order to understand the impact of the current competition and how it could possibility change when TPG enters the Singapore market.

As per table above, despite revenue increasing, net profit of the Telcos has decreased. This has further contributed to Starhub and M1 reducing their dividend for the latest reporting year.

Other than competition, in my opinion, there could potentially 2 other reasons that caused the net profit to decline. 

Failure to innovate and react to the changes in the industry – It seems that prior to the announcement of TPG as the 4th Telco, the existing Telcos did not innovate much from their existing business. Thus, by rushing to innovate now, the Telcos have to incur extra expenses.

Bidding of Bandwidth as per April 2017 – The bidding of the bandwidth in 2017 resulted in higher loans taken by the incumbents to pay for their winning bids. Thus, higher loans resulted in higher financing cost, which eventually could have reduced the net profit.

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