What We Can Learn About the Real Value of Singapore Telecommunications Limited Stock from a Recent Acquisition

Some investors have achieved long-term investing success by measuring the value of a company through a comparison with the prices that knowledgeable acquirers have paid to takeover similar companies – prominent investors in this camp include Mario Gabelli and Arnold Van Den Berg.

That is why it can be useful for us to keep an eye on acquisitions that are happening in the stock market.

Lately, Malaysia-listed telecommunications outfit Axiata Group Bhd (KLSE: 6888.KL) had agreed to acquire a controlling 80% stake in Nepal’s largest mobile operator, Ncell. This acquisition can be used to help shed some light on the value of Singapore’s own telecommunications giant, Singapore Telecommunications Limited (SGX: Z74).

Background of Axiata

The Malaysia-based Axiata is one of the largest telecommunications groups in Asia with over 260 million customers. It holds significant interests in mobile operators in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, India, and Singapore. In addition, the Malaysian-grown holding company also has a stake in non-mobile telecommunications operations in Pakistan.

Axiata’s mobile subsidiaries and associates include Celcom in Malaysia, XL in Indonesia, Dialog in Sri Lanka, Robi in Bangladesh, Smart in Cambodia, Idea in India, and, yes, M1 Ltd (SGX: B2F) in Singapore.

The acquisition of Ncell

As already mentioned, Ncell is the number one player in Nepal. The company has 13 million subscribers and holds 48.8% of subscriber market share and 57% of revenue market share in the country, according to Axiata’s filing.

Axiata wants to acquire an 80% share of Ncell for RM5.91 billion (US$1.365 billion), including debt. This translates to 5 times EV (Enterprise Value) to EBITDA (Earnings before interest, taxes, depreciation, and amortisation). EV to EBIDTA is a number widely used to value telecom-related companies. For more on the EV to EBITDA valuation metric and its uses in investing, check out here and here.

Singtel’s value

The acquisition of Ncell by Axiata, which would have to be approved by Axiata’s shareholders, allows us to compare the current value of Singtel to the two aforementioned telcos. This technique of comparing valuation metrics is also known as relative valuation.

Singtel, Axiata, and Ncell - EV to EBITDA multiple
Source: S&P Capital IQ; Axiata’s filing (click table for larger image)

Looking at the simple calculations above, we can see that Singtel is priced much higher – in terms of EV to EBITDA – than both Axiata and Ncell.

Foolish Takeaway

In my previous articles (see here and here), I wrote about the attractiveness of Singtel as a business. But, that does not necessarily make Singtel a good investment – we need to pay an attractive price to ensure investment success. So, the main question for investors now with regard to Singtel is this: Is the company priced attractively at the moment?

In comparison to Ncell, it seems like Singtel is priced at a huge premium. Since Singtel is more stable and diversified as compared to Ncell, a premium might not be unreasonable. But, is a 170% premium a little too much to pay? There is no one right answer, so you’d need to consider your investing assumptions carefully before making a decision.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.