- Financial Ratios
Operating revenue grew 7.1 per cent to S$18.07 billion, led by robust mobile performance in Singapore and Australia and further lifted by the 3.4 per cent strengthening of the Australian Dollar from a year ago.
Operational EBITDA for the SingTel grew 5.6 per cent from a year ago with growth from Optus. EBITDA in Australia rose 12 per cent in Singapore Dollar terms, driven by higher contributions from all its business segments. The Singapore Business’ EBITDA, however, was lower by 1.7 per cent from a year ago, reflecting higher acquisition costs of mio TV content and mobile connections as well as investments made to grow new businesses.
SingTel is committed to an optimal capital structure and constantly reviews its capital structure to balance capital efficiency and financial flexibility.
SingTel has strong credit ratings and is committed to maintaining its investment grade credit ratings. SingTel is currently rated A+ by Standard & Poor’s and Aa2 by Moody’s Investors Service.
- DuPont System
From the financial year ended 31 March 2010 to the financial year ended 31 March 2011, modified DuPont system for SingTel (Millions of Singapore Dollars).
Core profit was hurt by higher 3G‐related depreciation and interest costs plus a higher tax rate. But revenue rose 12% year over year and EBITDA margin was stable.
- Business Risk
Historical annual financials (S$ m)
Volatility index (FY2007- FY2010)
The SingTel has successfully diversified its earnings base through its expansion and investments in overseas markets. On a proportionate basis if the associates are consolidated line-byline, operations outside Singapore accounted for 77 per cent (FY 2010: 75 per cent) of the SingTel’s proportionate revenue and 76 per cent (FY 2010: 74 per cent) of proportionate EBITDA.
In Singapore, operating revenue was up 6.8 per cent. This was mainly driven by double-digit growth of 11 per cent in Mobile Communications on strong postpaid customer growth and higher postpaid average revenue per user (ARPU). Information Technology and Engineering (IT&E) revenue also rose 8.2 per cent boosted by higher revenue from the fibre rollout contract with OpenNet Pte. Ltd. (OpenNet).
In Australia, Optus delivered a 3.7 per cent increase in operating revenue, underpinned by mobile service revenue growth of 8.4 per cent with continued postpaid and wireless broadband customer growth in a highly competitive market. Fixed revenues declined as Optus continued to exit marginal resale services. Optus’ translated revenue in Singapore Dollars grew 7.3 per cent from the previous year with a stronger Australian Dollar.
- Sustainable Growth Potential
In FY11, SingTel delivered 6.8% revenue growth in Singapore, but EBITDA declined 2.3%. The management has guided to single-digit revenue growth and flat absolute EBITDA in the future. Payback from smartphone investments and Pay TV would drive revenue CAGR of 3.9% and EBITDA CAGR of 4.2% in the future, with an improvement mainly happening from FY2011 onwards.
1.8 Corporate Governance
1.8.1 Board’s Conduct of Its Affairs
The Board oversees the business affairs of the SingTel Group. It assumes responsibility for the Group’s overall strategic plans and performance objectives, financial plans and annual budget, key operational initiatives, major funding and investment proposals, financial performance reviews, compliance and accountability systems, and corporate governance practices. The Board also appoints the Group CEO, approves the policies and guidelines for Board and Senior Management remuneration, and approves the appointment of Directors. In line with best practices in corporate governance, the Board also oversees long term succession planning for Senior Management.
SingTel has established financial authorization and approval limits for operating and capital expenditure, the procurement of goods and services, and the acquisition and disposal of investments. Apart from matters that specifically require the Board’s approval, such as the issue of shares, dividend distributions and other returns to shareholders, the Board approves transactions exceeding certain threshold limits, while delegating authority for transactions below those limits to Board Committees and the Management Committee so as to optimize operational efficiency.
Organization Structure
1.8.2 Remuneration of Directors
The aggregate compensation paid to or accrued to SingTel Directors for services in all capacities for the financial year ended 31 March 2011 is set out in the table below:
Remuneration of Senior Management
1.8.3 Access to Information
Prior to each Board meeting, SingTel’s Management provides the Board with information relevant to matters on the agenda for the Board meeting. The Board also receives regular reports pertaining to the operational and financial performance of the Group. In addition, Directors receive analysts’ reports on SingTel and other telecommunications companies on a quarterly basis. Such reports enable the Directors to keep abreast of key issues and developments in the industry, as well as challenges and opportunities for the Group.
The Board has separate and independent access to the Senior Management and the Company Secretary at all times.
1.8.4 Board and Management Committees
The following Board Committees assist the Board in executing its duties:
• Finance, Investment and Risk Committee
• Audit Committee
• Executive Resource and Compensation Committee
• Corporate Governance and Nominations Committee
• Optus Advisory Committee.
Each Board Committee may make decisions on matters within its terms of reference and applicable limits of authority. The terms of reference of each Committee are reviewed from time to time, as are the Committee structure and membership.
- Finance, Investment and Risk Committee
The main responsibilities of the FIRC include the provision of advisory support on the development of the SingTel Group’s overall strategy and on strategic issues for the Singapore and International businesses, approval of strategic, trade and portfolio investments and divestments of the Group, review of the Group’s Investment and Treasury Policy, evaluation and approval of any financial offers and banking facilities and management of the Group liabilities in accordance with the policies and directives of the Board.
- Audit Committee
The main responsibilities of the Audit Committee are to assist the Board in discharging its statutory and other responsibilities relating to internal controls, financial and accounting matters, compliance, and business and financial risk management.
- Executive Resource and Compensation Committee (ERCC)
The main responsibilities of the ERCC are to approve the Group’s policies on executive remuneration, and to administer and review any long term incentive schemes of SingTel.
- Corporate Governance and Nominations Committee
The main functions of the Corporate Governance and Nominations Committee are outlined in the commentaries on ‘Board Composition and Balance’, The Committee is also responsible for the development and review of SingTel’s corporate governance principles and practices, taking into account relevant local and.
- Optus Advisory Committee
The Optus Advisory Committee comprises at least three Directors, the majority of whom shall be non-executive Directors. The Committee reviews strategic business issues relating to the Australian business.
- Management Committee
In addition to the five Board Committees, SingTel has a Management Committee that comprises the Group CEO, CEO (Singapore), CEO (International), CEO (Optus), Group CFO, Group Chief Information Officer, Group Chief Strategy Officer and Group Director (Human Resource).
The Management Committee meets every week to review and direct Management on operational policies and activities.
1.8.5 Shareholders Rights and Situation
Voting rights:
On a show of hands - every member present in person and each proxy shall have one vote .On a poll - every member present in person or by proxy shall have one vote for every share he holds or represents (The Company cannot exercise any voting rights in respect of shares held by it as treasury shares).
Substantial shareholders
Temasek Holding (Pte) Ltd uses their shareholder rights to affect the company's development strategy and policy, but does not participate in its operational decisions.
1.9 Shareholder Value Added – SVA
What Does Shareholder Value Added - SVA Mean?
A value-based performance measure of a company's worth to shareholders. The basic calculation is net operating profit after tax (NOPAT) minus the cost of capital from the issuance of debt and equity, based on the company's weighted average cost of capital:
(Data from the Bloomberg)
Quite simply, EVA is the profit earned by the firm less the cost of financing the firm's capital.
From the excel we can see, the fluctuation of EVA is due to the fluctuation of NOPAT IN 2008 and 2010, NOPAT reduction and tax increase led to a sharp decline in EVA. In 2011year, NOPAT grew on the back of strong mobile revenue growth from both the Singapore and Australia operations, further boosted by the stronger Australian Dollar.
1.10 SWOT Analysis
Singapore Telecommunication (SingTel) is an Asia communication company providing telecommunication service. SingTel is Asia largest multi-market mobile operator, serving more than 136 million customers in eight markets. A strong market position enables the company to generate incremental revenues and further enhance its brand equity. However, intense competition could result in loss of markets share and lower average revenue per user.
- Strengths
Strong market position
The company has a strong market position in the telecommunication market. Together with its regional partners, SingTel is Asia's largest multi-market mobile operator, serving more than 136 million customers in eight markets including Australia, India, Indonesia, the Philippines, Singapore, Thailand, Bangladesh and Pakistan. Its customer base in Bangladesh, Singapore, Australia, Philippines, Thailand, India and Indonesia is 1.2 million, 1.8 million, 6.7 million 17 million, 21 million, 37 million and 39 million respectively. The company is a leader in the broadband internet market with a share of 53.4% in Singapore. It is also a leading mobile operator in Singapore with the market share of 38%. In Australia, through Optus, the company serves more than six million customers. Strong market position enhances the brand image of the company and gives it a competitive edge.
Comprehensive services
The company offers comprehensive services. Its broad array of wireline services include: cable-based and satellite based fixed telecommunications network services (FTNS) such as domestic and IDD services, leased lines, data communications, lease of satellite capacity, inmarsat and internet services. It offers wireless services offers mobile telecommunications services such as cellular and paging services and sale of handsets and pagers. Furthermore the company also offers information technology consultancy, systems integration and engineering services. Comprehensive services increase its opportunity to reach out to a wider clientele, thus creating greater revenue generating opportunities.
Diversified business portfolio
The company has a diversified business portfolio. The diversified business portfolio reduces its business risks and provides cross selling opportunities.
- Weaknesses
High dependence on Australia
SingTel derives a significant share of its revenues from Australia. High dependence upon Australia increases the company's exposure to local factors such as local competition, severe weather conditions, labor strikes, change in regulations and socio-economic conditions.
- Opportunities
3G technology
Demand for third generation (3G) mobile services is expected to increase in the medium term. Demand for 3G services, which offer advanced features like video telephony over mobile phones, high speed video transmission and data transmission is expected to increase. In January 2007, Optus launched 3G mobile in the wholesale market, complementing its two existing wholesale products; Video Calling and Optus Wireless Connect. In the same month, Optus announced plans to extend its 3G network footprint. The new network will reach 96% of the Australian population, replicating the coverage of Optus’ existing national 2G mobile network which covers over 650,000 square kilometers of Australia’s landmass. The market for 3G services in Asia is potentially large and expected to grow at a rapid pace in the coming years. Shift to 3G services would help the company boost its revenues and profits.
- Threats
Intense competition
SingTel is facing intense competition in the Australian mobile phone segment. Australia has four mobile network carriers, including Telstra, Optus, Vodafone and Hutchison, who own and operate six mobile networks. In addition the Australian mobile market has a number of resellers and mobile virtual network operators. Intense competition could result in loss of market share and lower average revenue per user.
Regulatory risks
SingTel's operations in Singapore and other countries are subject to extensive government regulation which limits its flexibility to respond to market conditions, competition, new technologies or changes in the cost structure. The operations of its Australian subsidiary, Optus, in particular, are subject to regulatory decisions on the rates at which it purchases services from, and the rates at which it provides services to, other telecommunications companies in the country. Such decisions can significantly affect Optus' revenues and costs as well as its competitive position. Many regulatory decisions in Australia are not subject to appeal. Adverse regulatory decisions could negatively affect the market position of the company.
Mature mobile market
The Australian mobile market is mature. The Australian mobile phone market has been growing at an exponential rate over the last decade and 77% of the population has a mobile phone, making further growth very tough. Maintaining existing customers or growing the customer base in a mature market is difficult. The company will have to compete with the likes of Optus and Vodafone for the two million potential customers. This could affect the company's average revenue for customer and ultimately its profit margins.
- Discounted Cash Flow Valuation
There are three paths to discounted cash flow valuation: The first is to value just the equity stake in the business; the second is to value the entire firm, which includes, besides equity, the other claimholders in the firm (bondholders, preferred stockholders, and so on); and the third is to value the firm in pieces, beginning with its operations and adding the effects on value of debt and other non-equity claims. In this projection, we are just required to value the stock of SingTel, so we use the first path.
2.1 Reasons for Choosing FCFE Model
There are three models we have learned to value stocks: Dividend Discount Model (DDM), Free Cash Flow to Equity (FCFE), Free Cash Flow to Firm(FCFF). Finally we choose FCFE model as our approach to value stock price of SingTel for the following reasons:
Comparison 1: DDM vs. FCFE
As the biggest company in telecommunication field of Singapore, SingTel takes an important position in the industry and owes market power. Additionally, it is a mature corporation with sufficient cash flow. It seems suitable to use DDM. However, we searched some data from Bloomberg, and found that SingTel’s dividends are not close to free cash flow to equity over the past six years. From the flowing two figures about dividends and free cash flow to equity from 2006 to 2011, we can easily aware that in 2007, dividends payment is significant greater than 110% of FCFE, and for other years dividends payments are less than 80% of FCFE. The dividend payments are not close to FCFE. So we choose to use FCFE model rather than DDM.
Figure 2.1 Dividends From 2006-2011
Figure 2.2 Free Cash Flow to Equity From 2006-2011
Comparison 2: FCFE vs. FCFF
From the fundamental analysis in the first part of this article, we find the SingTel’s capital structure is very stable, and stable capital structure means stable net debt issuing. So it is more convenient and direct for us to choose FCFE rather than FCFF.
2.2 Determine the Value of Equity
2.2.1 Assumption and Model
We assume that SingTel is growing at a stable growth rate and hence in steady state, since it is a mature firm and the growth rate in the past several years are close to each other which can be seen in the following analysis.
Thus, we use constant growth FCFE model to value the stock of SingTel. The value of equity, under the constant growth model, is a function of the expected FCFE in the next period, the stable growth rate, and the required rate of return.
Value=FCFE1/(ke-gn)
where Value=Value of stock today
FCFE1 =Expected FCFE next year
ke =Cost of equity of the firm
gn=Growth rate in FCFE for the firm forever.
2.2.2 Estimation of Cost of Equity
Step1: Find out Risk-free rate and Risk Premium
We searched the bond rate of Singapore in Bloomberg and got a value of 1.630% ,which will be used as risk-free rate. And we will also use the value of Country Risk Premium 9.380%, which is a historical risk premium. The Beta shown in Figure 2.3 is based on regression, but we prefer to use bottom up Beta, which will be discussed later.
Figure 2.3 country data
Step 2: Calculate Bottom-up Beta
Since the regression betas will almost always be either too noisy or skewed by estimation choices to be useful measures of the equity risk in a company, we use bottom-up beta to estimate SingTel’s cost of equity.
We have five steps to estimate bottom-up beta:
Firstly, we find the businesses that SingTel operate in. The businesses includes Mobil Communication, Data and Internet, IT and Engineering, National Telephone, Sale of equipment, International Telephone, Pay Television and others.
Secondly, we find the regression betas for these businesses, and then compute the simple average across the regression betas. Then un-lever this average beta using the average debt to equity ratio across SingTel. Finally, we obtain the value of unlevered betas for each business. The specific numbers are demonstrated in the EXCEL attached.
Thirdly, calculate the weights for each business using the revenues. The specific numbers are demonstrated in the EXCEL attached.
The next step is computing the weighted average of the unlevered betas of the different businesses. The specific numbers are demonstrated in the EXCEL attached.
Finally, computing the levered beta for SingTel, using the Hamada Equation: βL = βU[1 + (1 − T)φ]. The specific numbers are demonstrated in the EXCEL attached.
So we get the value of bottom-up beta is 0.4307[1+(1-29.18%)*23.09%]=0.5011
Step 3 Calculate Cost of Equity
Based on the data listed above, we can do the calculation:
Cost of Equity=Rf +Equity Beta*[E(Rm)- Rf ]
=1.63%+0.5011*9.380%
=6.33%
2.2.3 Estimation of FCFE Growth Rate
- Formulas:
The following formulas can help us calculate the FCFE growth rate:
FCFE growth rate = equity reinvestment rate * non-cash ROE
Equity Reinvestment Rate =(net CapEx + change in WC - net debt issues) / net income
- Calculations:
Step 1：Calculate ERR
We use the latest five years’ data and the second formula above to estimate the ERR. Reason to use latest five years’ data is that the latest years’ situation is closer to the current situation and make the result more accurate. (Results are shown in Figure 2.4)
Step 2：Calculate FCFE growth rate
We use the latest five years’ non-cash ROE and ERR calculated in Step 1, with the first formula above we can obtain the value of FCFE growth rate for each year. (Results are shown in Figure 2.4)
Figure 2.4 (Units: million SGD)
So we can obtain the average FCFE growth rate is
(5.32%+8.21%+4.85%+2.98%+3.14%)/5=4.9%.
2.2.4 Estimation of FCFE1
Step1: Calculate Net Income next year
In order to get the value of FCFE1 , we need to estimate the net income next year firstly.
Expected growth rate in net income= Equity reinvestment rate*Return on equity
Using data in the Figure2.4, we can calculate the average equity reinvestment rate is 3.64%. From Bloomberg, we searched the 5-year average ROE for 2011 is $17.47m, and we use the average value to do the estimation. So Expected growth rate in net income=3.64%*17.47=63.66%
Net income this year is $3822.7m (demonstrated in income statement), then net income next year is $3822.7m*(1+63.66%)=$6256.2m
Step 2: Calculate Normalized FCFE for current year
We begin by estimating a normalized free cash flow to equity for the current year. To estimate net capital expenditures, we will use the average capital expenditures among the latest ten years, which proved to be $1917.94m and the depreciation from the most recent year which has a value of $1878.0m. Finally, we will assume that the book value debt to capital ratio this year 23.09% is the percentage by which future reinvestment needs will come from debt.
Net income next year=$6256.2m
Net capex (1-Debt ratio)=(Average capex-depreciation)(1-Debt ratio)
=(1917.94-1878)(1-23.09%)=$30.72m
Change in working capital(1-Debt ratio)=11.70(1-23.09%)=9.00
So, Normalized FCFE for current year=Net income next year-Net capex(1-Debt ratio)- Change in working capital(1-Debt ratio)=$6216.48m
Step 3: Calculate FCFE1
With the normalized FCFE estimated above and a perpetual growth rate of 4.9%, we can find the FCFE1 =$6216.48m*(1+4.9%)=$6521.09m
2.2.5 Calculation of Value of Equity
Value of equity=Expected FCFE next year/(Cost of equity-Expected growth)
=6216.48*(1.049)/(6.33%-4.9%)
=$62006.21m
We also searched the number of shares is 15939.90m, then
price per share = value of equity/nmber of shares
=$62006.21m/15939.90m=$3.89
Comparing the price per share $3.89 to the current price in market $3.13, we conclude that it is undervalued, under the assumption that the difference is not because of mispricing.
2.2.6 Summary
The process that we value the equity can be expressed with the following figure:
2.3 Sensitivity of Our Valuation to the Assumptions
There are many assumptions used in the valuation. Firstly to make DCF approaches make sense, the assumptions include: Markets are not necessarily efficient all the time and do make mistakes in assessing value; We can find those mistakes by using the right valuation models; Markets will correct their mistakes over time; Market prices can deviate from intrinsic values and that prices will revert back to intrinsic value sooner or later.
Without these assumptions, using DCF to value the stock is meaningless, because even though we have the value estimated, it has nothing to do with the market. We get the value per share $3.89, while the current share price in market is $3.13. Only with these assumptions can we say the equity is undervalued, and holding the stocks is worthy. Without these assumptions, our valuation is ridiculous and meaningless，additionally, without these assumptions we don’t know whether in the future its price will be higher or not even if it is really undervalued, thus we don’t know whether it is worth buying or not.
The key assumption in this valuation is SingTel is growing at a stable growth rate. Only in this case can we use the constant growth FCFE model. If the SingTel is not at a stable growth rate, for example, it is developing fast, and has a high growth rate, then our model will not be suitable. So our valuation is very sensitive the this assumption.
Also, we assume that the book value debt to capital ratio this year 23.09% is the percentage by which future reinvestment needs will come from debt. This is the book value, the real market value is not the same with it. So if we take the real market situation in, the final value of equity will be higher since the debt ratio in market is higher than the book value. It proves that the valuation is also sensitive to the change of this assumption.
- Relative Valuation
Beside DCF Valuation model, relative valuation models, such as P/E multiples, price/book multiples using forecasted earnings and cash flows are also very popular among analysts.
Unlike those absolute valuation models that generate an estimated dollar value for the stock, in relative valuation model, we do not seek to estimate the dollar value of the stock, but rather to determine whether a stock appears to be better or worse than other similar stocks. In the former, we might conclude that a stock is undervalued, while in the latter, we may only conclude that the stock is undervalued relative to its peers.
One of the difficult tasks using relative valuation model is to identify a set of comparable companies, since companies are distinctive to each other and there are no absolutely identical companies in the market. Here we will compare SingTel to the whole Singapore stock market and to peer companies classified by Bloomberg (total 16 companies)
In our report, we will use several relative valuation models, including Earning multiples, Book Value multiples and Revenue Multiples.
3.1 Earning Multiples
3.1.1 P/E Ratio
The Price-earnings multiples (PE) is the most widely used valuation model. It is simple, but with the problem that its relationship to a firm’s financial fundamentals is often ignored, leading to significant errors in applications.
It is not prudent to cite a lower-than-average P/E ratio as evidence that a stock is undervalued. Instead, investors should interpret a lower-than-average P/E ratio as evidence that the market believes the company’s prospects are less attractive than average. We can only interpret a low P/E as evidence of under-pricing if we develop independent evidence that the company’s future prospects are more attractive than the market believes they are.
In order to avoid the misinterpretation, we will use several PE Ratio comparisons against both the whole market and the peer companies of Telecom Industry.
a) Comparing PE Ratio across markets
To be more precisely valuing the company, let’s look at the whole market at first. Comparisons are often made between price-earnings ratios in different countries to testify whether the market is undervalued or overvalued.
The following table shows the comparison between different markets in Asia Pacific region.
Table 1: PE Ratio across markets in Asia Pacific Region
Data Source: Bloomberg
PE = 8.21 + 102.60 (Growth Rate) + 18.28 (Payout Ratio) - 99.06 (RF Rate) - 112.78 (Risk Premium)
[7.66] [44.65] [7.68] [47.96] [56.67]
R2 = 47%
Generally we are able to observe the following which consistent to the theories:
- Countries with higher expected growth have higher PE ratios
- Countries viewed more riskier (higher risk premiums) have high PE
- Markets with higher payout ratio have higher PE
Singapore market is lower than the average of all the fundamentals listed above. Based on the regression, the current expected PE Ratio would have been:
PE = 8.21 + 102.6 * 9.04% +18.28 * 39.28% - 99.06*2.40%-112.78*9.38% = 11.70
Since current real PE of Singapore market is only 7.87, this would have indicated an undervalued market.
However, it is still too rash to make the conclusion. Considering some macroeconomic issues, going forward, nominal GDP growth in Singapore would be lower than the FY11 level of 14%, so we do not assume high expectation from the market. Besides, compare to other markets, Singapore is quite small and is very highly regulated market, in this sense, lower PE is not a bad sign, since it shows the market is quite stable and rationale.
b) Comparing a Market’s PE Ratio across Time
Usually analysts and market strategists compare the PE ratio of a market to its historical average to make judgments about whether the market is under - or - overvalued.
Here, we could examine whether Singapore Market by comparing to its historical norms.
Table 2: Market PE Ratio across Time
Data Source: Bloomberg
PE = -18.95 + 103.76(Growth Rate) +87.63 (Payout Ratio) + 141.28 (RF rate) -244.14(Premium)
[25.49] [54.93] [41.29] [301.89] [80.12]
R2 = 62%
Table 3: Compare Real PE and Expected PE
After comparing to historical norms, Singapore market is over-valued by about 2.17 to expected PE 5.70. While we need to be cautious when drawing too strong a conclusion from such comparison, since fundamentals change over time. Current Payout Ratio is the lowest compare to previous years and grow has slowed down, which has drag the PE ratio down, but still better than expected PE calculated by the regression, which indicates that market expectation is still there.
After having done the two comparisons above, we could conclude that Singapore Stock Market is quite stable and rationale, not very volatile. Then let’s move on comparing the PE ratio of SingTel to peer companies and the whole stock market.
c) Comparing SingTel’s PE Ratio to peer companies
The most common approach to estimating the PE ratio for a firm is to choose a group of comparable firms, to calculate the average PE ratio for this group, and to subjectively adjust this average for differences between the firm being valued and the comparable firms. However, the definition of a comparable firm is essentially a subjective one. Firms in the industry can have very different business mixes and risk and growth profiles. Here, we will use the peer companies recommended by Bloomberg (total 16 companies)
Table 4: Comparing PE Ratio for Global Telecom Firms (Bloomberg Peers)
Data Source: Bloomberg
PE = 8.82+0.42(ROE)+6.05(Raw Beta) +30.24(Expected Growth)
[11.99][4.24] [14.45] [7.75]
R2 = 69%
By using the regression, we could get the result that SingTel stock is undervalued.
Calculated by using the regression equation, Starhub and M1 stocks are overvalued, but SingTel is under-valued by 3.40. Theoretically, a stock's P/E tells us how much more investors are willing to pay for each dollar. In this case, Investors are willing to pay S$12.57 per share rather than its true value S$15.97, this has shows a market’s optimism concerning a firm’s growth prospects. But we should not make buy or sell decision based on the multiple alone. Let’s look into the issue.
Data Source: IIFL Report
Both Starhub and M1 show strong growth. SingTel had a period of exclusivity up to 2009 for selling iPhones, following which the revenue is much higher than the other two competitors. But now Singapore market is quite undifferentiated, with all three telcos offering iPhone. Also further lowering of entry barriers for providing services would bring down differentiation opportunities that SingTel’s size and full-service range would have traditionally afforded. However, our optimism is still on its long-term growth, though near-term challenges caused by competitive pressures.
e) Advantages and Disadvantage of Using P/E
Advantage:
The biggest advantage of the P/E ratio is that it is easy to use. It is only a very basic tool and method of evaluating the worth of the shares of a company, it can be used to make quick decisions.
The P/E is a much more indicative means for the real value of the share than the price alone, which means that P/E is an excellent benchmarking tool both relative to the industry average, and also the competitors of the specific company. Another is the P/E shows actual expectations of the company. If it is expected to continue to perform well, the share price of the company tend to be higher, thus raising the P/E of the company.
Disadvantages:
As mentioned above, P/E Ratio mostly shows an expectation of the investors on the stock and the market, so when the general business and economic environment has an optimistic sentiment, than investors tend to over-price shares, thus raising P/E. There are also times when the economy and the business world are viewed worse than it actually is, in this situation, shares in particular, are undervalued in terms of their P/Es.
To conclude, the PE Ratio can only be useful if it is used to compare the company stocks with other company P/Es of the same industry and with the industry average, and with its historical P/E.
What’s more, the regression methodology itself may bring us some imprecision to the comparison. Since the independent variables are correlated with each other and it is based on a linear relationship between PE ratios and the fundamentals, which might not be appropriate, and the basic relationship between PE ratios and financial variables itself is not stable, if it shifts from year to year, the predictions from the regression equation may not be reliable for extended periods.
3.1.2 PEG Ratio
Portfolio manager and analyst sometimes compare PE ratios to the expected growth rate to identify undervalued and overvalued stocks. PEG Ratio is effective while tracking the high-growth firms and sectors. The approach offers the promise of a way of controlling for differences in growth across firms, while preserving the inherent simplicity of a multiple. Mentioned in previous parts, the cost of equity is lower than the growth, which indicates that SingTel is still experiencing high-growth now. PEG Ratio is always used for technology stocks. These are also the reason we choose the method to value SingTel here.
a) Comparing SingTel’s PEG Ratio to peer companies
Table 5: Comparing PEG Ratio for Global Telecom Firms (Bloomberg Peers)
Data Source: Bloomberg
PEG = 4.49 - 1.18(Payout Ratio) - 5.02(Beta)+0.43In(Growth)
[3.79] [1.90] [4.79] [0.95]
R2 = 11%
The low R-squared is indicative of the problem with this multiple and the difficulties to use it in comparison across the firms. Anyway, let’s just try on to see the result.
Here SingTel’s PEG is negative; using the regression; we could have the expected PEG Ratio:
PEG Ratio = 4.49 – 1.18 * 107.52% - 5.02 *0.999 +0.43* 1.2351 = -1.26
Compare to real PEG Ratio -5.82, the stock is undervalued.
According to some general rule, PEG Ratio tends to decrease as the growth rate decrease. The PEG ratio of 1 is sometimes said to represent a fair trade-off between the values of cost and the values of growth, indicating that a stock is reasonably valued given the expected growth. The PEG Ratio can be a negative number, for example, when earnings are expected to decline. This may be a bad signal, but not necessarily so. Under many circumstances a company will not grow earnings while its free cash flow improves substantially.
This result has consistent with the previous PE Ratio comparison to peer companies, that SingTel is undervalued. The competition has tempered upside of the company’s growth. However, we expect SingTel to benefit from its NBN in the long term, but we factor in near-term competitive pressure from other two telecos.
b) Comparing SingTel’s PEG Ratio across Firms in the Singapore Market
(See Appendix - Table 6)
PEG = 3.18 + 0.32 (Beta) +0.18 (Payout Ratio) - 0.68 IN(Growth)
[0.42] [0.23] [0.35] [0.08]
R2 = 21%
Same problem with comparing to peer companies, the low R-squared present difficulty in using the regression to calculate.
3.1.3 Relative PE Ratio
Relative price earnings ratio measures a firm’s PE ratio relative to the market average.
Here, we have obtained both SingTel’s and Singapore exchange market historical PE ratios.
Table 7: Relative PE Ratio
Data Source: Bloomberg
Current Market P/E = 7.87
Expected PE = 7.87 x 1.10 = 8.67
Real SingTel PE = 14.91
Over-valued = 14.91-8.67= 6.24
Above we use historical average relative PE ratio, since all fundamentals changes overtime, which may make the expected PE Ratio low, thus leading to the result of over-valued the company.
If we use the most recent relative PE Ratio 1.49 dated as at Jun. 2011, considerably high in historical prospect, we could get the expected PE ratio as:
Expected PE = 7.87 x 1.49 = 11.73
Over-valued = 14.91- 11.73 = 3.18
Data Source: Bloomberg
3.1.4 EV/EBITDA
This multiple is most widely used in capital-intensive firms with heavy infrastructure investments. For SingTel, capital expenditure is required for investment in infrastructures.
Table 8: Comparing EV/EBITDA for Global Telecom Firms (Bloomberg Peers)
Data Source: Bloomberg
EV/EBITDA = 13.00 - 9.87(Effective Tax Rate) - 12.07(DA/EBITDA) - 3.45(Cap/EBITDA)
[1.73] [4.55] [3.24] [2.21]
R2 = 66%
By using the regression, the predicted value to EBITDA multiple is:
EV/EBITDA = 13.00 - 9.87*0.14 - 12.07*0.39- 3.45*(-0.39) = 8.25
At 10.38 times of EBITDA, the company is overvalued.
Table 9: Comparing EBITDA, EV and EV/EBITDA between Peer Companies
However, from other aspects, compare those peer companies with approximate Enterprise Value, it is very obvious that SingTel’s EBITDA is quite low with only 5.08 billion, while other are around 12 billions or above.
From the analyst report below, we could see that SingTel guided to flat consolidated EBITDA for FY12 onwards.
- Book Value Multiples
3.2.1 Price - Book Value Ratio
a) Comparing SingTel’s PBV Ratio to peer companies
Table 10: Comparing PBV for Global Telecom Firms (Bloomberg Peers)
Data Source: Bloomberg
PBV = -38.11+79.15(ROE)-10.07(Payout Ratio)+40.67(Beta)+5.81(Expected Growth)
[13.01] [5.00] [4.23] [17.6] [26.62]
R2 = 98%
The R-Squared is 98%, which is quite high. This has show a strong positive relationship between price to book ratios and return on Equity, which is quite common in many markets. Firms with higher returns on equity have higher price-book ratios.
Using the regression equation, the predicted price-book value ratio is:
Predicted PBV = -38.11+79.15*16%-10.07*107.52%+40.67*0.999+5.81*3.44% = 4.55
SingTel is undervalued, with actual price-book ratio of 1.96 and a predicted price-to-book ratio of 4.55.
However, from the relationship between price-book value ratios and returns on equity, it is expected to see firms with high ROE have high PBV ratio, visa versa. We only need to have a attention on those mismatches of PBV Ratio and ROE, that is low PBV ratio and high ROE, or high PBV ratios and low ROE.
Here, compare to peers, SingTel has low ROE and low PBV Ratio, which considered reasonable.
b) Comparing SingTel’s PBV Ratio in the whole Singapore stock market
When comparing to the entire stock market (See Appendix - Table 11), we could get the regression equation:
PBV = -2.96 + 23.466 (ROE) + 1.85(Payout Ratio)-0.34(Beta)+0.81(Expected Growth)
[0.50] [0.81] [0.53] [0.37] [0.15]
R2 = 82%
Predicted PBV = -2.96 + 23.466 *16% + 1.85*107.52%-0.34*0.999+0.81*3.44% = 2.47
SingTel is undervalued, with actual price-book ratio of 1.96 and a predicted price-to-book ratio of 2.47.
The reason why SingTel is less undervalued when compare to the whole Singapore market than to its peer companies is that the accounting standards vary across firms in different countries. This is one of the disadvantages associated with Price-book value ratio, making it not comparable sometimes across same sector containing firms in different regions. Therefore comparing SingTel’s PBV Ratio in the whole Singapore market is more reasonable, since the firms are adopting the same accounting standard.
- Revenue Multiples
3.3.1 Price-to- Sales Ratio
- Comparing SingTel’s PS Ratio to peer companies
Table 12: Comparing SingTel's PS Ratio for Global Telecom Firms (Bloomberg Peers)
Data Source: Bloomberg
PS = 0.47 + 0.019(Payout Ratio) - 0.025 (Beta) - 0.005(Expected Growth)+0.107(Profit Margin)
[0.76] [0.30] [0.69] [0.005] [0.028]
R2 = 66%
Using the regression equation, we could get predicted PS ratio :
PS = 0.47 + 0.019* 1.08 - 0.025*1.00 - 0.005*(-2.16)+0.107*21.17 = 2.74
SingTel is slightly undervalued, with actual PS ratio of 2.66 and a predicted PS ratio of 2.74.
Again, we need to look at mismatches. Firms with high revenue ratios and low profit margins as well as firms with low revenue multiples and high profit margin should get our attentions. Here, SingTel do not have this mismatch problem, the valuation is quite fair.
- Option Pricing Model
The main premise of using this valuation method: the company has a lot of asset which would not produce current cash flow but have future value (such as: product options, patents, copyrights, mineral and land). SingTel is not available for OPM because it is a company which focusing on mobile communications and data operations。Here are the reasons:
Firstly, SingTel widely distributed business. High-tech and patent contribute a little to total revenue.
Contribution brought by the patent and High-tech is difficult to predict because SingTel has a lot of subsidiary in different countries and regions.（SingTel focus on Singapore and Australia, but it also has investments in mobile operators in Bangladesh, India, Indonesia, Pakistan, the Philippines, and Thailand）
Secondly, SingTel has little asset with option features.
In summary, we believe that OPM could not be used to value SingTel.
- Value of Control
The value of the control premium that will be paid to acquire a block of equity will depend upon two factors. One is probability that control of firm will change which can be achieved either through acquisition or through existing stockholders exercising their muscle. Another is value of gaining control of the company.
The largest shareholder of SingTel is Temasek Holding (Pte) Ltd., an owned by the . The Figure below shows the proportion of SingTel’s shares hold by Temasek Holding. It becomes stable recently though it declines from 74.86% to about 54%. We insist that the proportion will never be fewer than 50% because Temasek Holding is a State-owned company which will not give up the control of the largest telecommunication operator in Singapore in the foreseeable future. Therefore, the probability that control of SingTel will change is very close to zero if the proportion hold by Temasek Holding is still more than 50%. We have a sufficient reason that we do not have to estimate value of control for SingTel due to no probability of control changing.
- Final Value Estimate and Recommendation
Based on the above analysis, the development of SingTel mostly benefits from its international investment strategy. Since 2000, SingTel focuses on investing in Asia Pacific. SingTel has the strong competitive advantage both in Singapore and Australia, at the same time, exploiting other markets such as Indonesia and India spreads the investment risk and cuts down equity capital cost. SingTel keeps investing in research and development, and launches innovative products successively. All of this provides a powerful driving force for future growth. Meanwhile, SingTel continues to improve management, which lowers depreciation and amortization expense in the proportion of total income, as to ensure that the rate of return on equity capital maintains a certain level instead of reducing by expanding the scale of investment. Constant innovation and a stable rate of return on equity capital ensure that SingTel maintains a steady growth.
Therefore, we think SingTel is in the mature growth stage. According to DCF valuation and relative valuation, we expect the target price of SingTel is S$3.89 (PE16.19X) in the next six month, while the current price is S$3.13（PE13.03X）. So our recommendation is “Buy”.
However, supervision of local government, rising cost, strong pressure from competition and exchange rate and other factors bring some difficulties.
