Charts 1a, 1b, and 1c show the historical performance of PRY, NKT and SEI over the past 10 years. The historical performance provides an indication of the business’s capacity and capability to consistently generate income, excluding any new prospects and investment tailwinds. Also shown in the charts are the expected financials of these companies, which forecast their financial performance after incorporating prospects and tailwinds. From the charts, PRY and SEI appear to have both good historical and predicted financial performance covering their revenue, net income, operating cash flow and free cash flow.
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Profitability
Charts 2a, 2b, and 2c show the financial profitability ratios of PRY, NKT and SEI. Profitability in the context of this comparison covers return on equity (ROE) and return on assets (ROA). It also includes margins, which cover operating margins and net income margins. Aside from historical figures, the forecast ratios are also illustrated, which incorporate guidance figures, analyst estimates, and business-specific risks. From the charts, all companies have good estimated profitability ratios, although NKT has shown the best improvement in its figures over the past five years.
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Financial health
Several balance sheet ratios determine a company's financial health. These ratios include the quick ratio, current ratio, net debt-to-equity ratio, interest coverage ratio, Altman Z-score and debt grade rating. The benchmark for liquidity, specifically the current ratio, is considered healthy when it is above one. All companies have passed this test; however, using a more conservative ratio, which is the quick ratio, SEI is the healthiest. For solvency, only PRY has a somewhat concerning net debt-to-equity ratio of 0.7 times, but its interest coverage ratio is very healthy at 13 times. The benchmark for a healthy interest coverage is more than twice. Conversely, only Prysmian has a good Altman-Z score, which is above the benchmark of three. NKT’s and SEI’s scores of 2.52 and 2.73, respectively, indicate that each company has a moderate risk of bankruptcy. The last aspect of financial health is the grade of the company’s debt, which reflects the probability of default. All companies have investment-grade rated debt, which is a positive sign. However, when comparing individual companies, NKT has the highest quality debt, rated at Tier 1.
Relative valuations
Chart 3 shows the relative valuations of PRY, NKT and SEI. The price multiples shown are forward or estimated figures, and ‘relative’ in this context means comparing these multiples against their peer group. Lower multiples relative to the peer group average indicate that the company is trading at a discount, or in other words, undervalued. Only SEI is undervalued for all four forward price multiples, as it is below the peer average. In terms of dividends, only PRY and SEI pay them on a periodic basis. Prysmian’s current and estimated dividend yield is 0.92%, while SEI’s figures are 1.86% and 1.92% respectively. Both PRY and NKT’s yields are unattractive compared to prevailing risk-free rates. Although NKT does not pay dividends, it may be justified, given that the company is using cash for capital expenditures.
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Sentiment
According to our analysis of analyst sentiment, SEI has the best sentiment among analysts, with 10 “buy” calls, four “hold” calls, and no “sell” calls. However, in terms of potential upside over the next 12 months, Prysmian has the most favourable sentiment, with an average target price 7.2% above its current trading price. NKT is trading at fair value, while SEI is overvalued by 8.8% based on the difference between the current trading price and the average target price.
Overall valuations
Based on a methodology that incorporates multiple types of valuations, the intrinsic value of each company is presented in Charts 4a, 4b and 4c. The methodology includes discounted cash flow, margin of safety, price-to-value growth, sensitivity, and comparables valuation to determine the fair value of the company. Based on the charts, both PRY and SEI are slightly undervalued, while NKT is slightly overvalued.
All three stocks should be accessible to Singapore investors through their international trading account from most available investment brokers.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
