2 Risks Singapore Telecommunications Limited Is Facing And How It Plans To Address Them
Singapore Telecommunications Limited (SGX: Z74) is a giant telecommunications company with annual revenues of over S$16 billion and business interests in many countries.
Any company, big or small, faces risks that could damage its business. In Singtel’s latest annual report – for its fiscal year ended 31 March 2016 – the company discussed the economic and political risks it has to deal with.
I thought it’d be very useful to share Singtel’s discussion as both risks can have significant impacts on the long-term business prospects of the company. Understanding Singtel’s economic and political risks and how it intends to address them will help investors better evaluate the company’s future profitability.
Singtel commented that “changes in domestic, regional and global economic conditions may have a material adverse effect on the demand for telecommunications, information technology (IT) and related services, [and] digital services.”
Although Singtel is providing a service that is deemed as essential, weakening economic conditions may encourage the telco’s customers to tighten their wallets. For example, enterprise customers may choose to reduce or defer certain IT-related expenses.
If the economy weakens, it may also result in Singtel’s competitors reducing prices to retain and/or attract customers. This can result in price wars.
In any case, weak economic conditions have the potential to increase pressure on Singtel’s revenue and subsequently, its bottom line.
To address economic risks, the company’s “planning and management review processes involve the periodic monitoring of budgets and expenditures to minimise the risk of over-investment.” In addition, each business unit within Singtel has “continuing cost management programmes to drive improvements in their cost structures.”
Some of the countries in which Singtel’s Group Consumer business segment operates in (for perspective, the countries that Singtel has a presence in include Singapore, Australia, Indonesia, Philippines, Thailand, India, and more) have experienced or continue to experience political instability.
Singtel added that the “continuation or re-emergence of such political instability in the future could have a material adverse effect on economic or social conditions in those countries, as well as on the ownership, control and condition of [SingTel’s assets] in those areas.”
The telco’s Group Enterprise and Group Digital Life business segments do not face the same level of political risks as the Group Consumer segment, but as they grow across the region and around the world, their “exposure to similar political risks may increase in the future.”
Singtel believes that the geographical diversification of its Group Consumer business helps lower political risks. The company also works closely with management and partners in the countries where it operates “to leverage the local expertise, knowledge and ability.” The telco believes that doing so helps (1) ensure that it is compliant with local laws and (2) it implement risk-mitigation measures.
Final Foolish musings
What I have above is a quick summary of the regulatory risks outlined by Singtel in its latest annual report.
Given that risks and the management of risks are part and parcel of running a company successfully, it is important that investors understand them before investing in any company.