Singapore Telecommunications Limited (SGX: Z74) or Singtel, is one of the three main telco in Singapore. The other two are M1 Ltd (SGX: B2F) and StarHub Ltd (SGX: CC3). The group has three main business segments, namely Consumer, Enterprise and Digital Life.
At the current price of S$3.17 (at time of writing), the company’s stock is trading at 17% lower compared to its 52-week high of S$3.80. This decline captured my attention and got me interested in finding out more about the company. In particular, I want to understand: Does Singtel have a high-quality business?
For me, this question is important. If Singtel has a high-quality business, the lower stock price could be an investment opportunity. Unfortunately, there’s no easy answer to the question. But a simple metric, the return on invested capital (ROIC), can help shed some light on the question.
A brief introduction to the ROIC
In a previous article of mine, I explained how the ROIC can be used to evaluate the quality of a business.
The idea behind the ROIC is that a business with a higher ROIC requires less capital to generate a profit, and thus gives investors a higher return for each dollar that is invested in the business. High-quality businesses tend to have high ROICs while a low ROIC is often associated with a low-quality business.
You can see how the math works for the ROIC in the formula above.
The table below shows how Singtel’s ROIC looks like. I used numbers from its fiscal year ended 31 March 2018 (FY2018).
Source: Singtel’s Annual Report
For FY2018, Singtel generated an ROIC of 28%. This figure means that for every dollar of capital invested in the business, SingTel earned 28 cents in profit. From my observation, the company’s ROIC of 28% is above the average compared to many other companies that I have studied in the past, suggesting that Singtel has a high-quality business.
There are a number of things that investors should note about Singtel’s ROIC calculation above.
Firstly, Singtel generated a significant amount of income from its investment in associates and joint ventures, which was excluded from the analysis above. It might be useful to carry up to a separate analysis on the attractiveness of these ventures.
Next, Singtel generated S$1.94 billion an exceptional profit from the partial disposal of its stake in NetLink NBN Trust (SGX: CJLU), which is non-recurring. At the same time, the telco has S$1.8 billion in short-term borrowings which was excluded from the above calculation of capital employed.
We think that the ROIC calculation above was partially distorted by both points mentioned above. Adjusting for both points will give us an adjusted ROIC of 14.9%.
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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.