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The Stronger Stock Now: Singapore Telecommunications Limited vs. StarHub Ltd

There are two important similarities between Singapore Telecommunications Limited (SGX: Z74) and StarHub Ltd (SGX: CC3).

First, both firms are blue chip stocks given that they are a part of the local stock market barometer, the Straits Times Index (SGX: ^STI). Second, they are both companies that provide telecommunications services to the public in Singapore (Singtel does have a strong overseas presence as well though, in countries such as Australia, Indonesia, Thailand, and more).

Given these, the individual investor might wonder: Would Singtel or StarHub be the stronger telecommunications stock at the moment?

There are many other things for investors to study in order to arrive at an answer to the question above, but in here, let’s focus on three key aspects of the two companies’ business fundamentals: The strength of their balance sheets, their track record of growth, and their valuation.

Strength of the balance sheet

A weak balance sheet – one that’s stuffed full of debt – can expose investors to high levels of risk. When a company with a weak balance sheet has difficulties servicing or repaying its loans, its shareholders may have to face some painful outcomes such as dilution, the elimination of dividends, involuntary sales of assets, and in the worst-case scenario, bankruptcy.

Here’s a look at the balance sheets of Singtel and StarHub:

Singtel, Starhub balance sheet table
Source: Companies’ earnings report

Turns out, it’s a bad tie as both companies have high debt levels that heavily outweigh their cash on hand. Singtel ended 2015 with S$686 million in cash and equivalents and total debt of S$10.2 billion. In the case of StarHub, its selfsame figures were S$173 million and S$688 million, respectively.

That said, investors may want to note that telcos tend to have recurring and stable revenue streams which enables them to take on more debt to generate returns for shareholders. But, I think the presence of high levels of debt is still a risk and something to keep an eye on.

Track record of growth

An observation of the track record of both Singtel and StarHub can give investors an idea of what to expect from their businesses in the future. But, bear in mind that history is merely a guideline; it’s far from being a perfect indicator of the future.

The metrics I’m interested in are the two telcos’ revenues, profits, and operating cash flows. The following table illustrates the growth in the three metrics for Singtel and StarHub over the past five years:

Singtel, Starhub growth table
Source: S&P Global Market Intelligence

From the above, it’s clear that StarHub’s the company with the superior historical revenue and profit growth. As a result, it’s StarHub that takes the cake here.

Valuation

The best business can still be a horrible investment if bought at too high price. This is why valuations are important.

Given that the profits and free cash flows for Singtel and Starhub have tended to not fluctuate wildly over the years, simple ratios such as the price-to-earnings (PE) and price-to-free cash flow (PFCF) can serve as useful valuation measures. Here’s how Singtel and StarHub stack up:

Singtel, Starhub valuation table
Source: S&P Global Market Intelligence

As you can see, Singtel and StarHub have similar PE ratios, but the former is the one with the lower PFCF ratio.

A Fool’s take

When the scores are tallied, we have an overall tie here. Although StarHub’s the company with the better track record of growth, it’s also the pricier stock when compared to Singtel. Meanwhile, both Singtel and StarHub have balance sheets that look weak given the substantial amounts of debt they hold.

As a reminder, what we’ve seen above about Singtel and StarHub can be useful and important. But, they shouldn’t be taken as the final word on the investing merits of both companies. Like I’ve mentioned earlier, there are other important areas of the duo’s businesses to look at.

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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 writer Chong Ser Jing doesn't own shares in any companies mentioned.