Why Investors Shouldn't Be Surprised By Singapore Telecommunications Limited's (SGX:Z74) P/E

By
Simply Wall St
Published
June 30, 2021
SGX:Z74
Source: Shutterstock

With a price-to-earnings (or "P/E") ratio of 67.7x Singapore Telecommunications Limited (SGX:Z74) may be sending very bearish signals at the moment, given that almost half of all companies in Singapore have P/E ratios under 15x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Singapore Telecommunications has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Singapore Telecommunications

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SGX:Z74 Price Based on Past Earnings July 1st 2021
Keen to find out how analysts think Singapore Telecommunications' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Singapore Telecommunications' Growth Trending?

In order to justify its P/E ratio, Singapore Telecommunications would need to produce outstanding growth well in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 49%. This means it has also seen a slide in earnings over the longer-term as EPS is down 90% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 75% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 15% per annum, which is noticeably less attractive.

In light of this, it's understandable that Singapore Telecommunications' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Singapore Telecommunications' P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Singapore Telecommunications maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Singapore Telecommunications, and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Singapore Telecommunications, explore our interactive list of high quality stocks to get an idea of what else is out there.

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