Category: SG Budget Babe

How much commissions do insurance agents earn?

Everyone’s talking about how a former AXA Life Insurance agent, RameshKrishnan, has been awarded $4 million in damages. High Court Judicial Commissioner George awarded this based on the establishment package offered by Prudential:

  •        A commencement allowance of $675,000 +
  •       An initial monthly salary of $65,625 +
  •        A salary of $43,750 for the next 12 months. 
In other words, we can look at this as a $4 million annual paycheck that was given out.




Many had a lot to say about the absurdly high pay.

Credits: The Straits Times Singapore Facebook page


The key question I had after reading the news article was: 

Was the agents’ focus on regular premium policies self-motivated?

“The Ramesh Organisation had focused predominantly on regular premium policies instead of single premium policies since the beginning of 2010. 

(Regular premium policies are those for which the policyholder pays premiums throughout the life of the policy, while single premium policies are those where, as the name suggests, the policyholder pays one premium at the start of the period of cover.) 

The persistency ratio for single premium policies tends to be more volatile as policyholders will typically cash out these policies to realise the profit when market conditions are favourable. Ramesh asserts that the CEO then, Mr Gilbert Pak, had assured him in February 2010 that they was agreeable to taking into account only the persistency ratio in respect of regular premium policies when assessing the eligibility of Ramesh Organisation advisers for incentives and awards in the event that their persistency ratio in respect of single premium products dropped as a result of the organisation’s shift in focus. On this assurance, the Ramesh Organisation had focused on regular premium products.”       Source 

Doesn’t this sound like the agents’ motivation to sell regular premium policies were not purely based on their customers’ needs anymore, but also because they wanted to increase their persistency ratio? It sounded like this to me leh?

(The persistency ratio is a key assessment criteria of an agent’s performance in running for the bonus awards and incentives given to top performers.)


Letter from AXA’s CEO Glenn Williams


High Number of Lapsed / Surrendered Policies 

“Based on our observations of notable trends [on] the lapsing and surrendering of policies, we have strong reason to believe that the ex-advisers in [the] Ramesh Organisation have been involved in [the] twisting of clients’ policies. We are very concerned as to whether the clients have been provided with proper advice or [whether] any improper switching/replacement practices [have been] carried out by the ex-advisers which are detrimental to [the] clients’ interests.”

(“Twisting” is a term used to describe the situation where a policyholder is persuaded to allow an existing policy to lapse, only to enter into a new policy on similar terms.)


“Twisting” hurts the consumer but is a sweet deal for the agent who stands to earn the commissions all over again. However, it is unclear from the judgment if any evidence was found thereafter to support AXA’s claim that the agent had indeed practised “twisting”, and probably only the agents themselves will have the answer.


Source: The Straits Times

The next question we’re all wondering is, how much do financial advisors stand to earn from selling us insurance?

Coupled with the ongoing debate over term and life insurance, many financial bloggers advocate Buy Term and Invest the Rest (BTIR), whereas insurance agents cry out that you should be getting Whole Life (WL) Insurance instead. Recently, there was even a rather contentious article put out (by an insurance agent, unsurprisingly) to argue in favour of whole life policies.

Who’s right and who’s wrong? That’s a topic for another day, but in the meantime, you can read my previous posts on this debate here and hereOne common argument raised by BTIR advocates is that insurance agents are pushing for WL because it lines their pockets with hefty commissions.


Is that true? How much does your insurance agent stand to gain if he sells you a whole life policy instead of term insurance?

Let’s take a look.

Someone managed to get a copy of the Agency Schedule of Commissions from one of the major insurance companies in Singapore, which I’ve reproduced below and will be using for the purpose of this article.

 Credits

As you can see from the commission table above, whole life insurance, endowment and investment-linked policies (ILPs) have the highest commission rates.


Read why I cancelled my ILP here.


Let’s look at two insurance agents – one who advocates BTIR, and another who promotes WL. 
Year Percentage of Premium *
1 50%
2 25%
3 to 6 5%

Selling Whole Life Insurance

Woohoo! You’ve just closed a whole life policy with an annual premium of $4000 (I’m using the quote I recently got from my agent for 500k TPD if you were wondering).


1. Your 1st year commission is $2000
2. You get renewal commission in the 2nd year of $1000
3. Renewal commission in the 3rd to 6th year is $200 yearly

All you need to do to earn $50,000 in the first year is to close 25 cases of whole life policies with an annualised premium of $4000. 

That doesn’t sound too difficult, does it? You technically just need to find at least 2 customers every month to hit your quota. Even my 9-6pm job didn’t pay me this much income!


Selling Term Insurance


On the other hand, let’s compare to the other agent who closes a term policy with average annualised premiums of $400 instead. Let’s call him Jack.


1. 1st year commission: $200
2. 2nd year commission: $100
3. 3rd to 6th year commission: $20 yearly

Unlike you, Jack needs to find 250 consumers to buy term insurance from him if he wants to match up to your $50k annual income. Assuming he goes for vacation in June and December with his kids, that means he needs to close 25 customers every month, or almost 1 sale a day!

Let’s not forget that insurance companies also offer a lot of other perks to their agents, including bonuses and long-term incentives that can significantly boost your income too.

How do I know? Well, I married an ex-insurance agent who was pretty terrible at his job (because he mostly sold term, health and travel insurance – stuff which I agree with). He didn’t push ILPs or endowment plans, and that’s why I told him to quit his job and switch careers (I’m not kidding).

Still not enough proof for you? Check out this Million Dollar Round Table (MDRT) Prudential insurance selling you the same dream career in this manner. You can earn $100,000 in a year! 

Selling Personal Accident Insurance

From the table, you can also see that accident plans have a flat rate of up to 30% which is payable throughout the entire premium-paying term. This means that you’re not just limited to 6 years worth of accident plans, but much longer!


The smart insurance agent could also then start your relationship and gain your trust by selling you a cheap personal accident plan, and then slowly upgrade you to other plans later on.

So how much commissions does your insurance agent earn from selling you that policy?

Well, now you know!


Also read: Questions to ask your insurance agent (including how much they stand to gain from you)


For the record, my policies are handled by my 3 agents who focus on selling me the plans I need instead of pushing me to stuff like ILPs or WL. Maybe because they know they’re dealing with Budget Babe, LOL. I’m not saying agents who promote such products are bad, but they definitely aren’t my cup of tea. At the end of the day, insurance is a complex product and there are no right or wrong answers. I cannot emphasize enough on having a trusted advisor who will be focused on selling you the right policies that fit your needs vs. the ones that line their pockets. Best of luck finding a good advisor!

With love,
Budget Babe

Does losing money make you a bad investor?

Does losing money make you a bad investor?Rather than get demoralised over losses, I believe that losing money is part and parcel of one’s investment journey for greater growth and insights. After all, some of the best lessons I learnt were when I lost…

Best Fixed Deposit accounts in Singapore right now

For those new to investing and looking for a way to grow your money while taking as little risk as possible, you can first consider either high-yield bank saving accounts (like UOB One, OCBC 365 or BOC SmartSaver), fixed deposits (FD) or government bonds (like the Singapore Savings Bonds).

For experienced investors, you aren’t the only one finding it tougher to find value buys in today’s market conditions. I’ve been sitting on a growing cash pile too, and there are lesser value stocks as compared to the same time in 2015 when China’s Black Monday happened. While waiting for the next bear market to come around, make your warchest count by parking it in fixed deposits to earn higher interest rates in the short-term.

The benefits of fixed deposits

       They are capital-guaranteed. You won’t lose a single cent.

       They offer guaranteed returns. You will know exactly how much returns you’ll be getting from this “investment”.

       There are different FDs of varying holding periods for everyone. You get to decide how long you want your investment to be parked away and how long to grow.

       They are oblivious to market fluctuations and are especially great in rising markets where you can’t find value stocks to deploy your money towards.

       They’re almost entirely risk-free, unless you withdraw the money before maturity which could result in lesser or no interest. The only other risk would be if the bank defaults, but there’s a low likelihood of that happening in Singapore.

You can choose from FDs with tenures as short as 1 month or as long as 5 years, and open a fixed deposit account with as little as S$1,000.

The best fixed deposit promotions in Singapore right now (Aug 2017)

If you’ve already maxed out the interest in your high-yield savings account and you’re looking for another place to park your money in, here’s a look at the best FD promotions currently available:

Bank

Promotional deposit tenure

12 months and 24 months

3, 6, 12 and 15 months

12 months

7 months

Promotional interest rates

12-month tenure – 1.40% p.a.

24-month tenure – 1.55% p.a.

0.70% p.a. to 1.35% p.a.

1% p.a.

Priority Banking customers – 1.05% p.a.

Non-Priority Banking customers – 1% p.a.

Minimum placement amount

S$5,000 in Savings Account and S$50,000 in Time Deposit Account

S$30,000

S$20,000

S$25,000

Promotion expiry date

Yet to be determined by Maybank

Yet to be determined by HLF

Yet to be determined by OCBC

31 August 2017

Singapore’s Deposit Insurance Scheme

If you’re still worried about putting your money in fixed deposits, rest assured that they’re as safe as keeping your money under your bed. Here’s something interesting about the banking system in Singapore that you may not be aware of: the MAS (Monetary Authority of Singapore) acts like a caped crusader protecting our deposits with all banks and finance companies that are licensed in Singapore. In the event that the bank/finance company where you’ve set up your fixed deposit account fails, our deposits up to S$50,000 are automatically insured under this scheme.

Sounds attractive enough? Let me know what you think!

If you’d like to get a personal loan or a credit card, you can also visit BankBazaar.sgto easily compare and apply for the best offers in Singapore.

Disclaimer: This post was written in collaboration with BankBazaar.sg.

With love,
Budget Babe

How To Say No To (Expensive) Wedding Invites

Attending weddings can be a reallllllllly expensive affair.  How do you politely decline when you’ve invited to an expensive wedding which you can’t afford to attend?How much would you give if you were invited to this $140,000 wedding?It is no sec…

The DBS Multi-Currency Account : Save on online shopping and overseas spending !

I’m a bit late to the game, but it was only recently that I found out about the DBS Multi-Currency Account (MCA) when I went to watch Pirates of the Caribbean at the cinemas and laughed like mad after this ad played.

Just watch the incredulous look on the shopkeeper’s face as he tries to process why his customer is telling him that he just made a rainbow in his pants LOL.

Whoever came up with this ad deserves an award.
Anyway, I digress. An account that lets me pay like a local overseas with no foreign exchange fee incurred, while letting me buy currencies at my preferred rate sounded pretty awesome to me.

It is no secret that I’m not a huge fan of cash. I pay by credit whenever I can in Singapore, and I’d love to swipe my card overseas too, but everyone knows you’re subjected to unfavourable foreign exchange rates and forex conversion fees when you do that.

Not anymore.

The MCA, together with a primary linked DBS Visa Debit Card, can now  enable you to make overseas transactions in the local currency –  directly from your bank account – without incurring these forex conversion fees. The savings are quite substantial – you save between 2.5% to 15% of forex fees and Dynamic Currency Conversion charges!

You can also store up to 12 currencies in your MCA account, including the USD, EUR, HKD, THB, JPY, AUD and more, and pay in up to 11 currencies using your linked DBS Visa Debit Card,which I’ve reviewed previously as the best debit card in the market

How to use your MCA for maximum benefits

Use the MCA when you shop online

Frequent online shoppers will know that when you pay in the local currency (usually USD or EUR) using your credit card, you’ll be in for a huge shock at the end of the month when your statement arrives. The result? You usually end up paying more than you thought you would for that item you bought online, thanks to the high conversion fees.

Then there are the hacks that tell you to shop in a certain currency because it is cheaper that way (psssst, here’s an ASOS hack: shop in EUR to snag your buys at the lowest rates!). But again, you suffer from the conversion fee when your monthly statement arrives.

(101.25 EUR = SGD 156. See how the price becomes cheaper?)


If I had the DBS Visa Debit Card linked to my MCA sooner, I could have bought more EUR when the price dipped to 1.48 earlier this year, and simply kept them in my digital wallet until now. This dress would then cost me even less!

Use the DBS Visa Debit Card linked to your MCA when you’re travelling overseas


When you book your train tickets and accommodation in advance for a trip, you can also use your MCA Visa Debit Card to pay in the local currency and skip all the FX / DCC charges!

You can also skip that trip to the money changers to convert your cash right before your trip, and avoid being stuck carrying huge wads of cash around hoping that you won’t be robbed (whether in Singapore or overseas). Just swipe with your card overseas and pay in the local currency.

Ran out of cash overseas? No need to be fleeced by the ATM or foreign moneychanger’s rate when you can simply withdraw from your MCA overseas (just pay the nominal ATM withdrawal fee – it is a small price for convenience and is usually about S$5 per withdrawal). Have insufficient foreign funds in your MCA? No worries, simply log on and transfer the foreign amount you need, and continue spending using your debit card overseas. No sweat!

You will no longer have to try and force yourself to shop at the airport in a bid to use up your remaining local currency before you fly home either. Just use your MCA 😉

Stock up on foreign currencies at favourable rates

Now here’s the trick: “stock up” on your foreign currency at favourable rates and keep them until you need it.

You can monitor exchange rates on the DBS FX website and make conversions when you see an attractive rate.

Remember how everyone was rushing to moneychangers to exchange for EUR when Brexit happened? I wanted to do that too, but I hated the idea of keeping thick wads of foreign cash in my drawer at home, especially when I can’t be sure that my pesky sibling isn’t going to steal it.

Well, I can just do it online with my MCA next time via iBanking!.

Note that this is ultimately a debit card

For those of you who are into the miles or cashback rebates game where you spend using your credit card overseas to chalk up rewards, note that these rewards do not apply for your DBS Visa Debit Card.

So you’re basically choosing between (a) zero forex fees + no DCC charges or (b) credit card rewards but incurring the additional FX & DCC charges

My preference is still for Option A, because I already try not to spend using my credit card overseas unless I have to (not entirely a fan of all those extra charges just for 10x more rewards!).

The fine print

– There is a fall-below fee of S$7.50 (for balances <S$3,000 equivalent) but it is waived for the eMCA account if you’re up to 29 years old).

– Store sufficient foreign currency funds in your MCA before you swipe your card to pay. If you don’t have enough foreign currency in your MCA, the transaction will be deducted from your SGD funds instead and you’ll end up incurring FX fees at the prevailing bank rate (eg. JPY à SGD à JPY).


– Your spending will have to be in full i.e. if you have only AUD 500 left, your AUD 1,000 purchase will be deducted in full from your SGD balance instead of just converting the remaining sum.

– This is a debit card, so you won’t be getting any miles from overseas spend. Nor will you be entitled to the 5% cashback on the DBS Visa Debit card (as that only applies to local Visa payWave spending).


– If you deposit or withdraw foreign currencies at the bank branch, you’ll have to pay the nominal fees charged (as a percentage of your withdrawal sum; similar to other banks’ practice). Skip this headache by simply going cashless!

Read more of the fine print here, and more FAQs here.


How to sign up

Existing POSB / DBS customers

Do it instantly online. Log into your DBS iBanking à select Apply à Deposit Accounts à DBS eMulti-Currency Autosave Account

Remember to also apply for the DBS Visa Debit Card separately if you don’t already have it. Link it to your MCA account so that it becomes your primary debiting account when you use the card.

New DBS customers

You can apply online as well and the DBS Visa Debit Card will come automatically with the account.



This truly is an innovative product, one that you should consider if you’ve always disliked the fees involved whenever you make payments with foreign currency. I’m now waiting for the rest of the banks to follow DBS’ lead.

This article is written in collaboration with DBS (after I watched their rainbow sprinkles ad in the cinemas, which was how I came to know about the product). All opinions are of my own.

IPO Analysis: Union Gas Holdings

Wow this has been a pretty busy season for IPOs thus far. The newest player to join the game is Union Gas Holdings, which will be listed on the Catalist Board. But before we delve into the analysis, let’s take a look at how the recent IPOs fa…

Freelancing? Here’s how you can still get approval for a home loan.

The gig economy is growing, and even the Ministry of Manpower (MOM) has now acknowledged the challenges faced by freelancers in Singapore (read the speech here). Aside from the insecurity that comes with not having a fixed monthly salary, many self-employed individuals often find their applications for personal loans rejected.
If you’re a freelancer and looking to build your own home, here’s how you can improve your chances of getting approved for a home loan.

The good news is, there are many banks in Singapore that provide self-employed individuals with home loans.

Today, about 14% of the Singapore workforce is self-employed, and the number of freelancers is steadily growing, currently standing at 200,000. In fact, MOM expects more people to take to self-employment with the existent shift in employment interests among Singaporeans.

So what makes you eligible for a home loan if you are self employed? Is it your income? Or is it your credit history? Or both? Or are other parameters involved as well? Whether or not you are an entrepreneur, a businessman or a freelancer, as long as you work for yourself and not under an employed, you’ll be classified as a self-employed individual when it comes to getting loans.


What should you know about home loans if you are a self-employed person?

Choosing self-employment as a means of livelihood is undoubtedly a difficult choice. To sustain your income, especially in the initial years, is even more difficult – forget the long hours spent at work coupled with the daily anticipation to make it big. You could’ve easily found employment elsewhere – in the government or the private sector. But you chose the hard (and potentially more fulfilling!) way, and your efforts are almost certain to bear fruit over time.

But as far as your home loan application is concerned, you should know that banks expect you (just like they expect any other applicant) to meet certain eligibility standards. The hard truth is, banks aren’t going to predict your long-term fortune and smoothly approve your application. Certain basic parameters need to be satisfied.

Here are some areas banks look at very seriously while approving your application:

1.   Income

Your income is obviously an important parameter that is examined. As a self employed individual, your income may vary from month to month – something that can work against you in getting your loan application approved.

But if your income levels are satisfactory and meet the bank’s internal norms and eligibility criteria, you can expect good news. Banks do not really mind if your income is variable on a month-on-month basis as long as your income levels are in line with the bank’s expectations.

Tip: Prepare your recent bank statements and show that your income is sufficient to manage loan repayments without too much difficulty.

2. Credit score

Your credit score is perhaps the most important parameter that is evaluated. Banks will look at how you’ve managed credit in the past and foresee your creditworthiness in the years to come. As home loans are associated with longer tenures, you must know that your credit history can significantly impact your loan application.

Note: Banks look at the credit factor more closely in the case of self-employed individuals. Instances of default and late payments can be quite a deterrent. On the brighter side, being self-employed and yet managing your credit well, especially in the light of variable income levels, will work in your favour.

Tip: Remember to pay off your credit cards on time to improve your credit score!

3. Your employment stability

Banks usually look for employment stability as an important parameter in approving a home loan application. If you are a salaried individual, standards of most banks dictate that you show proof of employment for a considerable period of time – at least three years. Similarly with self-employed individuals – banks expect that your work experience spans at least two years, and you need to back that up with sound proof.

Tip: Having a stable pool of clients can also help convince the bank that you will not have too much issue in earning your keep.

4. Having an existing relationship with the bank

Do you have an existing relationship with the bank you’ve applied for your home loan from? Well, although this particular parameter might not have a direct impact on your loan application, it is considered an essential aspect with the other factors such as your income and your credit score.

If other relevant parameters, say your credit score for instance, is slightly weak, your application might be considered if you’ve had an existing relationship with the bank for a good period of time. An existing relationship with the bank can be in the form of a savings account, a credit card, or an existing loan.

Tip: Your chances might be higher if you obtain the loan from the bank your savings are currently parked in.

5. Your CPF contribution history and filing your tax returns

Your Income Tax Notice of Assessment and your CPF contribution history, at least for the last two years, are also considered while processing and reviewing your home loan application. Making sure that you’ve been making CPF contributions and filing your tax returns will play a significant impact in getting your loan sanctioned.

Tip: Many freelancers try to understate their income in a bid to avoid paying income tax and CPF contributions. Avoid that as your actions today might be hindering your loan applications tomorrow.

What kind of interest rates can I expect to pay?

The interest rates on home loans for self-employed individuals are more or less similar to those offered to salaried individuals. (But if certain parameters like your credit score and your employment stability are slightly weak, you might be offered a slightly higher interest rate at times.)

I’ve previously written on the difference between SIBOR-pegged loans, fixed-rates and hybrid rates. For self-employed individuals, a fixed interest rate might be more appropriate, as it allows you to expect the total sum you’ll be paying throughout your loan tenure and plan your finances accordingly to meet these repayments.

Here are the interest rates of 3 current home loans available to self-employed individuals:

Bank of China Home Loan

DBS Home Loan

CIMB HDB Home Loan

1.86%

2.08%

3.72%

If you’d like to get a personal loan or a credit card, you can also visit BankBazaar.sg to easily compare and apply for the best offers in Singapore.

Disclaimer: This post was written in collaboration with BankBazaar.sg.


With love,
Budget Babe

IPO Analysis: NetLink Trust

I was alerted to NetLink’s IPO by my broker, who contacted me two weeks ago to offer private placement shares. The IPO officially opens tomorrow for public subscription, and there’s been a lot of media hype over what is being said to be the year’s “biggest IPO”. I’ve started analysing the IPO prospectus last week but sat on this post for the longest time because its insanely verbose and boring 516 pages put me to sleep on a few occasions -.-

Sorry to everyone who has been waiting! Without further ado, here’s my take.


Details:
– 2.89 billion shares for offer at $0.81 each 
– XXX public tranche (to be updated tomorrow)
– IPO closes on 17 July 2017, 12 noon.

Business:


Even though you’ve probably never heard of NetLink, the business isn’t new. Back in 2008, OpenNet won a tender to design and maintain passive infrastructure in Singapore in order to build a high-speed broadband network in Singapore. SingTel was supposed to transfer its manholes, ducts and exchange buildings to OpenNet, and so in 2011, SingTel established NetLink Trust to which it transferred its infrastructure assets to. NetLink then acquired OpenNet in 2013, with IDA mandating that SingTel needed to divest the majority of its ownership in NetLink by 2018.


Which leads us to this week’s IPO.

In a nutshell, NetLink designs, builds, owns and operates the passive fibre network infrastructure of Singapore’s Next Gen Nationwide Broadband Network. This currently consists of ten Central Offices and approximately 76,000 km of fibre cable, 16,200 km of ducts, and 62,000 manholes.

The majority of its network is used to support 3 types of end-user fibre connections:
1. Residential (currently supports 3 in 4 Singapore homes)
2. Non-residential / Commercial
3. Non-building address point (NBAP) connections

Who are its customers? 

The Trust Group’s primary customers are Requesting Licensees – SingTel, Starhub, M1, MyRepublic and Nucleus Connect. Competition or churn among Retail Service Providers does not adversely affect the number of connections that the Trust Group provides, as all Retail Service Providers utilise the Trust Group’s network (although not exclusively) in delivery of their active fibre services. To the extent that competition between Retail Service Providers reduces prices, such competition may lead to a higher number of fibre connections requested by end-users, so NetLink will still be the beneficiary regardless.


Strengths


There are a few tailwinds driving NetLink’s business in the near futurethe growth in data consumption and demand for faster Internet speeds, as well as Singapore’s Smart Nation initiative. I’ll elaborate more on these across the 3 segments later.

It is a monopolistic and resilient business model. Ultra high-speed fibre broadband has become a necessity and having tasted faster Internet speeds, who would want to go back to the age of the dinosaur? I quite like how the business is pretty much a monopoly (in the area of residential fibre connections). Its economic moat is quite strong as it will take a lot of resources for any other competitor to enter the market and set up its own infrastructure (not to mention near impossible, given the regulatory regime). For those of you who prefer investing in defensive stocks like telcos (SingTel, Starhub, M1) and rubbish-clearing services (800 Super, Colex), this will be another one you might want to add.

It has recurring revenues that are almost guaranteed. NetLink is highly cash generative, with an estimated $140 million for 2018 and $217 million for 2019. It is not hard to see why, as its revenue comes from a one-off installation charge for each termination point (upon the initial connection) and thereafter, a recurring monthly connection charge. The business is also resilient through economic cycles (would you use less / slower Internet in a recession? Nahhh…you’ll probably be watching more dramas in your free time instead!) With online video and audio services such as YouTube, Netflix and Spotify becoming a key lifestyle feature, user demand for data and faster speeds will only continue to grow.

Let’s take a look at its 3 different revenue sources:

Residential – NetLink is currently the market leader and while there is definitely growth in this segment (especially with new houses being built), there is a cap as there are only so many households in Singapore.


Corporate – The Trust currently supports one-third of the corporate market. While government grants to improve productivity through digitalisation and subsidies for enterprises should drive further growth, I am less optimistic on NetLink’s growth in this aspect as it competes with other RSPs (SingTel, Starhub and M1) which owns its own fibre network infrastructure in key business districts (eg. the CBD and Changi Business Park). Some of these providers also provide connectivity for data centres. 


NBAP – Here’s where I see unlimited growth potential which has largely been untapped on thus far. There are a lot more connections that can be made on our streets where NetLink stands to benefit from.


I’m optimistic on this as a major growth area because just look at how the growth in NBAP far surpasses that in residential and corporate connections!


It has highly scalable operations with low incremental costs. Once the basic infrastructure has been built, the hardest part is over and you can continue to support a growing number of connections without much incremental capital outlay other than maintaining the network. Furthermore, its operating costs will be kept relatively low as NetLink does not need to spend too much on marketing itself – it will mostly be the RSPs marketing their services to reach the end-consumers. 

Experienced management team with proven track record. I’ll quote from the prospectus on this one: “The Trustee-Manager is led by a strong executive management team, comprising the Chief Executive Officer, Mr. Tong Yew Heng, the Chief Financial Officer, Mr. Wong Hein Jee, and the Chief Operating Officer, Mr. Chye Hoon Pin, who together have more than 80 years of experience in investment management, infrastructure, and/or telecommunications sectors.”



Risks


Debt
At the moment, its total debt /EBITDA ratio is still at a healthy 2.3x. However, there will be high capital outlay until 2019 as the Trust expands its network infrastructure and management intends to fund this through bank loans. In today’s environment of rising interest rates, this will be a growing liability to take note of, and we should see its gearing increase accordingly in the next 2 years. The managers have also said that they expect the earnings (per unit) to drop from its current 2.06 cents to 1.14 cents next year, which means we’re looking at a potential 45% drop in net income next year, and this may or may not result in a knee-jerk reaction in its stock price, giving us another opportunity to buy in. 

Limited growth
The growth story promised by the Trust may very well sound appealing, with fantastic revenue increases of $258 million to $300 million in the last 2 years to boot. However, note that there is a cap on its growth in residential connections especially once it hits 100%, which shouldn’t be that far off in the near future. I’m less hopeful about its growth in the non-residential market for reasons detailed above. NBAP is promising but it remains to be seen how significant it will be in its revenue model. There is insufficient data at this point in time to gauge conclusively.

Potential compensation for downtime
IMDA is currently investigating the fibre service interruption incident which affected the Tanjong Rhu area on 13 December 2016. In addition, NLT’s fibre cables were damaged by a third party on 11 April 2017. The cable cut incident occurred along Boon Lay Avenue and damaged a total of eight fibre cables. As the cable cut affected more than 500 end-user connections, and full service restoration took longer than the 12-hour safe harbour, we might potentially be looking at a fine similar to the $500,000 imposed on OpenNet in 2014. If further interruptions were to occur, especially on a more major scale, I do not rule out the possibility that the Trust’s cashflows will be impacted by potential fines in the future.

Dividends are not guaranteed

This is a business trust, so don’t mistake it for a REIT where 90% of its taxable income is mandatory to be paid out to unit-holders.


Key Considerations

At 81 cents, is the stock overvalued?
P/E: 39x (using 2017’s EPU of 2.06 cents) is extremely high. To be fair, you’re basically paying a premium for its monopolistic and resilient business model with guaranteed resilient cash flows. 

P/B: approximately 0.9x but I’ll take this with a pinch of salt because it is quite unlikely that the Trust will be able to sell off its assets without regulatory intervention.

Has the growth story been fully factored into its current price?
NetLink’s growth is primarily limited to Singapore, and I’m more inclined to believe that the growth has already been factored in given its premium valuations. Unless NetLink finds another way to innovate and utilise its infrastructure to generate revenue through other newer means, there is a limited runway for this business to grow.

Who benefits the most from this IPO?
SingTel? After all, they’re looking at a potential $2 billion windfall from divesting 75% of their ownership in NetLink through this IPO. 


Conclusion

NetLink has a highly appealing business model which is resilient through economic cycles and poised to ride on Singapore’s Smart Nation initiative in the coming years. With a yield of 5+%, this is a good stock to hold for the long term for stable income payouts (as long as they don’t cut or withhold dividends completely).

Given the hype surrounding this IPO, I’m more inclined to take a contrarian approach since many people (even novice investors) have told me they’ll be buying. In the words of Warren Buffett, be greedy when others are fearful and fearful when others are greedy.

When I started on this analysis a week ago, it was stated that the IPO price would range from 80 to 91 cents per unit during the book-building phase. Since the price has been finalized at the lower end, it signals that there was probably lacklustre demand during this phase and thus I do not expect the price to rally too much on the first day of listing.

If it continues to be hyped up in the coming week, I won’t be surprised if the price increases slightly upon listing, only to drop again later on. I will sit on the sidelines for now and wait for a better chance to buy in.

There, I’m FINALLY DONE with 516 pages! >.<

With love,
Budget Babe

Recommended Books on Personal Finance & Investing

I’ve recently finished reading Millionaire Teacher by Andrew Hallam and it was a really good read! It is a title I would highly recommend to anyone who is just starting out on their journey to better manage their personal finances and get started on in…