TL;DR My target price for the firm was $0.22, exactly the trading price it is today. The main issue with growth for this firm is the high cost of capital resulting from high market risk as well as exposure to emerging markets.
Source: Nexwave Technologies
Business Story
TeleChoice International Limited ("TeleChoice") is a regional diversified provider and enabler of innovative info-communications products and services. After incorporating in Singapore, the firm has moved beyond our local shores and has expanded into Malaysia, Thailand and the Philippines.
Source: S and I Systems
The firm’s revenue has been on a general downward trend over the last few years, probably due to lower sales from increased competition. I couldn’t really identify any key competitive advantages that the firm had over other potential competitors, and therefore I chose to be more conservative in my estimates. The decrease in revenue could probably be attributed to lower sales from their retail stores locally.
However, there is a greater concerted effort for the firm to explore more international opportunities which can fuel more growth. They are also trying to increase their focus on B2B solutions, riding on the trend of innovation and digitization throughout Asia.
Valuation
With this story, I project that the firm will have a higher growth rate that the economy for the next 5 years. The high growth will be fuelled by a high reinvestment rate as well as a slightly higher Return on Capital. To be conservative, I lowered the ROC to 15% instead of their past high of 17%. This is closer to the industry average.
The growth rate in a stable period would be set at 1.5%, similar to the inflation rate. This is to prevent a more aggressive growth that is unrealistic.
The cost of capital for the firm is very high. For these I figures, I used the yield on the 10-year Singapore government bond, as well as the implied risk premium. I also added in a regional risk premium for exposure to the other Asian economies.
I projected a reinvestment rate to 75%, higher than the current rate to match industry reinvestment rates, which is a more conservative approach. The reinvestment rate is much lower during the low growth period, due mainly to the high return on capital for the firm.
I end up with the enterprise value of the firm after discounting the free cash flows to the firm. I then add back cash and minus out any debt and minority interests. I am finally left with a share price of $0.22, which is exactly the trading price of the firm. The growth of the firm actually destroys value, since the return on a capital only exceeds the cost of capital in the stable period. The key assumption that I made for the stable growth period is that Beta reduces to 1.2. To allow Beta to reduce, I allowed the high growth period to be 5 years. Any longer and more value would be destroyed.
TL;DR My target price for the firm was $0.22, exactly the trading price it is today. The main issue with growth for this firm is the high cost of capital resulting from high market risk as well as exposure to emerging markets.
Source: Nexwave Technologies
Business Story
TeleChoice International Limited ("TeleChoice") is a regional diversified provider and enabler of innovative info-communications products and services. After incorporating in Singapore, the firm has moved beyond our local shores and has expanded into Malaysia, Thailand and the Philippines.
Source: S and I Systems
The firm’s revenue has been on a general downward trend over the last few years, probably due to lower sales from increased competition. I couldn’t really identify any key competitive advantages that the firm had over other potential competitors, and therefore I chose to be more conservative in my estimates. The decrease in revenue could probably be attributed to lower sales from their retail stores locally.
However, there is a greater concerted effort for the firm to explore more international opportunities which can fuel more growth. They are also trying to increase their focus on B2B solutions, riding on the trend of innovation and digitization throughout Asia.
Valuation
With this story, I project that the firm will have a higher growth rate that the economy for the next 5 years. The high growth will be fuelled by a high reinvestment rate as well as a slightly higher Return on Capital. To be conservative, I lowered the ROC to 15% instead of their past high of 17%. This is closer to the industry average.
The growth rate in a stable period would be set at 1.5%, similar to the inflation rate. This is to prevent a more aggressive growth that is unrealistic.
The cost of capital for the firm is very high. For these I figures, I used the yield on the 10-year Singapore government bond, as well as the implied risk premium. I also added in a regional risk premium for exposure to the other Asian economies.
I projected a reinvestment rate to 75%, higher than the current rate to match industry reinvestment rates, which is a more conservative approach. The reinvestment rate is much lower during the low growth period, due mainly to the high return on capital for the firm.
I end up with the enterprise value of the firm after discounting the free cash flows to the firm. I then add back cash and minus out any debt and minority interests. I am finally left with a share price of $0.22, which is exactly the trading price of the firm. The growth of the firm actually destroys value, since the return on a capital only exceeds the cost of capital in the stable period. The key assumption that I made for the stable growth period is that Beta reduces to 1.2. To allow Beta to reduce, I allowed the high growth period to be 5 years. Any longer and more value would be destroyed.