Is Singapore Telecommunications Limited a Bargain Now?

Singapore Telecommunications Limited (SGX: Z74) is the largest company by market capitalisation within the Straits Times Index (SGX: ^STI). As such, it may be on the radar of many investors, with some of them perhaps thinking: Is it a bargain now?

There’s no easy answer, but we may be able to get some insight from Peter Lynch’s classic investment text, One Up On Wall Street.

Lynch is an investor worth learning from. As the head of the US-based Fidelity Magellan fund from 1977 to 1990, Lynch helped the fund earn an exceptional annualised return of 29%. In One Up On Wall Street, Lynch shared a general checklist he had used when he was analysing companies. Let’s look at each criterion in the checklist and how Singtel fares.

1. The Price-Earnings ratio: Is it low or high for this particular company and for similar companies in the same industry (generally, low PEs are preferred)?

At its current stock price of S$3.92, Singtel has a PE ratio of 16.3. This is nowhere near a five-year low as you can see in the chart below:

Singtel's PE ratio over past 5 years
Source: S&P Global Market Intelligence

Moreoever, Singtel’s PE ratio is also higher than those of its peers, StarHub Ltd (SGX: CC3) and M1 Ltd (SGX: B2F). The other two telcos have PE ratios of 14.4 and 13.2, respectively, at the moment.

2. What is the percentage of institutional ownership? The lower the better.

This criterion was added by Lynch because he thought that companies that were not noticed by institutional investors (big money managers) tended to make for better bargains.

According to Singtel’s latest annual report for its fiscal year ended 31 March 2016 (FY2016), Temasek Holdings has a 51.01% stake in the company as of 30 May 2016. Temasek is one of the investment arms of Singapore’s government and can be considered to be a large institutional investor.

3. Are insiders buying and whether the company itself is buying back its own shares? Both are good signs.

Over the past six months, the only insider who has bought shares is Peter Mason, a non-executive and independent director of Singtel. He had purchased 50,000 shares of the company on 6 December 2016 for a total sum of S$186,500.

In the case of Singtel buying back its own shares, there was also only just one instance of this happening in the past six months. On 10 February 2017, Singtel bought 232,563 of its own shares for around S$908,000.

4. What is the record of earnings growth and whether the earnings are sporadic or consistent?

The table below shows a record of Singtel’s earnings over its last 10 fiscal years:

Singtel EPS table
Source: S&P Global Market Intelligence

The telco has generated consistently positive earnings over the long-term. But as the table also shows, there’s hardly been any growth.

5. Does the company have a strong balance sheet?

As of 31 December 2016, Singtel has S$11.27 billion in total borrowings. With shareholders’ equity of S$26.95 billion, this gives rise to a debt to shareholders’ equity ratio of 41.8%. For a telco with a business model that has strong recurring revenues, a debt to shareholders’ equity ratio of 41.8% is reasonable.

A Foolish conclusion

To sum up the positives with Singtel, it is a company with consistent profitability and a decent balance sheet. As for the negatives, it has a high PE ratio (in relation to its own history as well as its peers), a high level of institutional ownership, a lack of earnings growth, and an absence of sustained insider buying or share buybacks.

Given these, it’s unlikely that Lynch would be too interested in Singtel right now. But in any case, it’s worth noting that all we’ve seen above about Singtel should only be taken as useful starting points for further research.

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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.