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Is Singapore Telecommunications Limited A Bargain Now?

Singapore’s largest operational telco, Singapore Telecommunications Limited (SGX: Z74), is also one of the largest stocks here with its market capitalisation of S$60.4 billion.

Given Singtel’s heft, investors may wonder if the company’s a bargain right now. Unfortunately, there is no easy answer. But, we may be able to find some clues from an investing checklist that the legendary investor Peter Lynch shared in his book One Up On Wall Street.

Lynch ran the US-based Fidelity Magellan fund from 1977 to 1990 and racked up an incredible annualised return of 29%. In One Up On Wall Street, Lynch wrote about a general checklist he had used when he was searching for investing opportunities. Let’s run Singtel through the checklist and see what turns up.

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)?

Right now, Singtel has a PE ratio of 10.5. The chart below shows the telco’s PE ratio over the past five years, and you can see that the current valuation multiple is at the lowest it’s been. This suggests that Singtel’s PE is low.


Source: S&P Global Market Intelligence

But, it should be noted that Singtel’s trailing earnings are padded by a one-off gain from the spin-off of NetLink NBN Trust (SGX: CJLU). If we adjust for the one-off gain, Singtel’s PE ratio would be around 16, which is near a five-year high. Meanwhile, Singtel’s local peers, StarHub Ltd (SGX: CC3) and M1 Ltd (SGX: B2F) currently have PE ratios of 17 and 12.3, respectively. From these perspectives, Singtel’s PE ratio appears to be high.

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.

In the case of Singtel, as of 29 May 2017, the telco counted Temasek Holdings as its largest shareholder with a 49.81% stake. Temasek is one of the Singapore government’s investment arms and is in fact, one of the largest sovereign wealth funds in the word.

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

Over the past six months, there have been no instances of insider buying, or the company repurchasing shares.

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

Here’s a record of Singtel’s earnings over the past decade from FY2007 (fiscal year ended 31 March 2007) to FY2017:


Source: S&P Global Market Intelligence

It turns out that Singtel has been consistently profitable for a long period of time. But, it’s also striking that there has hardly been any growth. The telco’s earnings per share in FY2017 was just 3.4% higher than in FY2007.

5. Does the company have a strong balance sheet?

Based on its latest financials as of 30 September 2017, Singtel had S$651.4 million in cash and equivalents, and S$10.169 billion in total debt. This leaves a net debt position of S$9.518 billion. But for a telco that has generated S$2.01 billion in free cash flow in the six months ended 30 September 2017, a net debt position of S$9.518 billion seems very reasonable.

A Final take

On the positive side, Singtel has a good record in generating profits, and a reasonably strong balance sheet. On the negative side, Singtel has a PE ratio (after adjustments) that’s near a five-year high, a high level of institutional ownership, a lack of buybacks and insider buying, and a lack of consistent growth in profit.

Judging from the results of the checklist, Lynch probably would not be too interested in Singtel at current prices. But, it’s worth noting that Lynch’s checklist, as useful as it may be, should only be seen as an informative starting point 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.