As investors, we often have to make tough choices between companies with similar operations in the name of diversification. While it’s easy to pick a plate of chicken rice over duck rice for lunch, comparing companies might be a whole other ball game. So, we’re here to help make life a little easier.
In the Foolish Face-off series, we have compared Singapore-listed companies with others that are listed on foreign stock exchanges. We’ve square off Thai Beverage with SABMiller, seen who won between Singapore Press Holdings and Pearson, compared Singapore Exchange with the London Stock Exchange and even took to the skies with Singapore Airlines and International Airlines Group.
We’ve since started looking at how locally-listed companies stack up against each other and our first duelling-and-drilling pair was Sembcorp Industries and Keppel Corp.
Singtel provides telecommunication services to more than 26 countries and served more than 445m mobile customers last year. It is the biggest company in the Singapore stock market in terms of market value but derived almost 80% of its earnings before interest, taxes, depreciation and amortisation (EBITDA) from foreign shores in its last financial year.
The company reports its results under two segments –SingTel and Optus. Optus’ main operations are based in Australia, and it has delivered 20% total growth in sales from S$9.94b in FY2007 to S$12.02b in the last year. Meanwhile, the SingTel group’s cumulative top-line growth comes in at an impressive 34%, from S$4.90b to S$6.57b.
Starhub, when compared to SingTel, is on a much smaller scale. The company provides mobile, pay TV, broadband and fixed network services to customers in Singapore, and has a mobile customer base of 2.2m.
The company derived 51% of its sales in 2012 from its Mobile segment. Pay TV made up 16% of last year’s sales while Fixed Network is close behind with a 15% stake. Lastly, Broadband and equipment made up 10% and 8% of 2012’s sales.
Even though the company is decidedly smaller than Singtel in terms of scale and market value, shareholders in Starhub have been richly rewarded. Shares of the smaller telecommunications company have increased by more than 300% from $1.10 in Dec 2004 to $4.49 currently. That is an admirable return considering that the Straits Times Index (SGX: ^STI) only returned about 60% in the same time period.
Despite its stellar shareholder returns, the company’s business performance has been relatively lacklustre since 2006. Starhub’s top-line grew by a cumulative 34% from S$1.80b in 2006 to S$2.42b in 2012 while profit barely budged from S$360.2m to S$359.3m.
|Last 12 month Sales||S$18.5b||S$2.42b|
Round 1: Valuation
The first round of the Foolish Face-off sees as comparing the two companies’ valuations to see which is being offered at a cheaper price by the market. We’ll be looking at their Price-to-Earnings (PE), Price-to-Sales (PS) and Dividend Yield.
|*Dividend Yield figures are based on total dividends paid in the last completed financial year. The rest are based on last 12 month’s financial figures.|
We can see that SingTel’s selling for a lower PE than Starhub but loses out on its dividend yield. Both companies are selling for 3.2 times sales. So, it’s a draw!
Winner: It’s a tie!
Round 2: Profitability
In Round 2, we turn our attention to the companies’ profit margins and return on assets (ROA). A company’s efficiency at turning each dollar of sales into profit can be known by observing its profit margins. Meanwhile, a ROA can indicate how efficient the company is at utilising its assets in generating profit. Generally, a higher ROA would indicate better efficiency.
|Return on Assets||9.9%||19.9%|
|*Based on last 12 months’ financial figures|
Starhub beats Singtel here with a better handle on Operating Margins and being almost twice as efficient in utilising its assets for profit.
Round 3: Growth
As investors, we would be concerned with a business’s growth in sales and profit as the intrinsic value of a business would generally move in tandem with those two figures. Meanwhile, growing dividends would also mean a greater income stream over time for investors and that is why we’re looking at revenue, EPS and dividend growth in Round 3 of the Foolish Face-off.
|Revenue Growth CAGR||6.1%||4.0%|
|EPS Growth CAGR||0.1%||3.9%|
|Dividend Growth CAGR||6.0%||1.7%|
|*Financial figures are based on the companies’ last 5 completed financial years.|
SingTel’s shareholders have experienced greater growth in revenue and dividends though it has had trouble converting sales growth into profit. Do note that Starhub has either increased or maintained its dividends since 2005. In any case, Round 3 belongs to SingTel.
Foolish Bottom Line
Final Score: 1-1. It’s a tie between SingTel and Starhub!
Our cursory glances at the two companies have them sharing the Foolish Face-off title. While Starhub displayed better profitability and SingTel trumped its smaller competitor in terms of growth, both companies were in a deadlock when it came to their valuation.
It seems that both companies might appear equal in the eyes of investors but it is important to note that we have not looked at other important factors in the appraisal of a business. Before a definitive conclusion can be reached, investors should also scrutinise the companies’ capital structure, competitive strengths, cash flow situation etc.
If you’re interested to know more about other local companies and how they might fare against each other in a friendly duel, then stay tuned as we bring you more Foolish Face-offs! Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.
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The Motley Fool’s purpose is to help the world invest, better. The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.