Tuas Limited (ASX: TUA) is an ASX-listed telecommunications company spun out of TPG Telecom (ASX: TPG) following the merger with Vodaphone in 2020. Many ASX small-cap investors will not be familiar with the stock, given all its operations reside in the small city-state of Singapore and investor materials leave a lot to be desired.
TPG’s founder David Teoh remains a part of the business, and shareholders will be hoping he can use the same playbook he used to disrupt the Australian market.
Teoh owns 37.3% of the company, with Robert Milner, chairman of Washington H Soul Pattinson (ASX: SOL) controlling a further 25.4 per cent.
Tuas has a market capitalisation of $610 million. Last month it reported revenue of $57.4 million in its FY 2022 results, representing year-on-year growth of 67%. As we’ll discuss below, Tuas is not yet profitable.
What does Tuas do?
Tuas, which trades under the brand name Simba (previously known as TPG Telecom) provides mobile plans focused on cost-conscious consumers in Singapore. Plans include large amounts of data, with other benefits including international minutes, unlimited voice calls and data roaming. While it varies depending on the specific plan features, Simba is typically around half the price of competitors.
The Simba brand has grown rapidly, increasing subscribers by 49 per cent in FY22 to 587,000 and now commands a market share above 6 per cent.
Cost-conscious customers are largely underserved by the incumbent mobile network operators (MNOs): Singtel, StarHub and M1. Mobile virtual network operations (MVNOs), which rent wholesale network capacity from an MNO, also don’t serve this cohort well. If an MVNO were to offer super-cheap plans and attract customers, the MVO simply increases wholesale fees and erodes any margin benefit. As a result, MVNO plans are priced more competitively but still above that of Simba.
After securing 4G and 5G spectrum from the Infocomm Media Development Authority (IMDA), Tuas is now building out its own network infrastructure. This requires a substantial upfront investment but positions the business to benefit from superior unit economic benefits if and when scale is reached.
How does Tuas stack up against competitors?
Data from IMDA reveals Simba’s network coverage exceeds 99 per cent, in line with other MNOs. But the quality of the network is inferior, as data from Open Signal demonstrates. Simba ranks last, and by a fair margin in most categories, amongst competing networks.
Source: https://www.opensignal.com/reports/2022/06/singapore/mobile-network-experience
Regarding 5G, Singtel already covers 95 per cent of the island. M1 expects to be fully 5G by March next year. Simba only expects to reach 60 per cent coverage by the end of 2023.
Simba’s customer service is also a concern. It ranks just 2.8 stars on comparison site Seedly. This is largely in line with the incumbents (M1 is slightly better with a 3.5-star rating), but pales in comparison to MVNOs such as MyRepublic, Giga, Gomo, and Circles which all have ratings above four stars.
What is the total addressable market for Tuas?
One unique feature of Singapore is the large number of mobile plans. It’s not uncommon to own either two sim cards in one phone (one for work, one for personal use), or two separate phones. As a result, the country has mobile penetration of 147 per cent among its population of 5.6 million.
As we’ve discussed above, Simba’s network does not stack up against the incumbents, and customer service is below that of MVNOs. Subsequently, most premium or middle-class customers are unlikely to be attracted to its offering, as they would rather pay more to secure a better mobile experience.
The question then becomes what part of the population is considered cost conscious. Using conservative expense assumptions, the Singapore economic development board calculates residents will need between $1,010 to $2,202 per month for living expenses. Another study by local academics found a family with two kids needs $6,426 whereas one elderly person spends just $1,421.
It’s not a perfect science, but for the purposes of this, I will use a monthly income of $2,000 or below as a proxy for cost-conscious. This falls between the third and fourth decile of average income per resident, which as a sense check sounds about correct.
Source: https://tablebuilder.singstat.gov.sg/table/CT/17730
Singapore’s population consists of 4.1 million residents and 1.5 million foreign workers and students. Using the $2,000 assumption, 1.44 million residents are classified as cost-conscious.
Of the foreign workers, 340,000 are skilled professionals, which as part of their visa must earn greater than $3,000. The remaining 943,000 are manual labourers imported from developing Asian countries. Men are recruited to work in construction, while women are employed as maids in households, known as ‘helpers’. Typically these workers do not earn more than $1,000/month and most of it is sent home to support family members. As an aside, this cohort of foreign workers values high data as wi-fi may not be easily available to them and international minutes are valuable to call home.
Adding the foreign manual labour plus the local population gives a total addressable market of 2.4 million people or 3.5 million services. An argument could be made that cost-conscious customers are unlikely to own more than one device, but anecdotal evidence suggests this might not be true. From my observations (and speaking to my family’s helper), foreign workers often own two phones. The same is true for delivery drivers, which is a much bigger employment industry here than in Australia due to the high population density and low car ownership.
Is Tuas profitable?
Tuas may be growing, but Tuas is not yet a profitable business. The company recorded a loss after tax of $26.7 million and a loss before tax of $28.2 million.
The cash flow statement is especially important for telcos, given the significant capex required to maintain networks which can be inaccurately reflected in the P&L statement. Tuas recorded its first year of positive operating cash flow in FY 2022, with an operating cash flow of $22.5 million. However, the company recorded a free cash outflow of $45.0 million once accounting for capital expenditure of $66.4 million, as it continues to build out network infrastructure.
Tuas expects further capital expenditures (capex) of $45-$50 million in FY23, which implies another free cash outflow, even when accounting for subscriber growth. Therefore FY24 is likely the first year investors could hope for positive free cash flow from Tuas.
CEO Richard Tan seemed to confirm this on the latest conference call. When asked if the business would be free cash flow positive in 2024, he said “I would still say it is too preliminary given we are working on 5G but obviously you can see we are now starting to build strong cash flows at least from an income position.”
Will Tuas succeed in Singapore?
It’s clear the value proposition offered by Simba has resonated with the local population in Singapore given the strong subscriber growth. However using our estimate of the TAM, it has already taken 16.7 per cent of customers likely to adopt the product, meaning growth could be limited in the longer term. It has somewhat countered this by launching business plans, but this has yet to gain serious momentum.
With an enterprise value of $595 million and profitability still two years away, in addition to the raft of competition and limited growth outlook, Tuas doesn’t excite me as an investment. Nonetheless, I think it’s a company worth following given the quality of investors backing the business. David Teoh may well help build Tuas Limited into another successful telecom business, but until we see the profits, it is difficult to know how to value the stock.
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Disclosure: neither the author of this article nor the editor own shares Tuas, and they will not trade shares in Tuas for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not an official recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).
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