You will be able to choose peers by business model, growth and risk, across SGX and overseas listings.
Marcus typed "semiconductor" into a stock screener, sorted by P/E and found Larkspur near the bottom of a list that ran from 8 times earnings to 60. For a moment it looked like a bargain. Then he read the names above it: the world's largest chip foundry, a maker of the lithography machines Larkspur's customers buy, two memory chipmakers and a chip designer. None of them does what Larkspur does. A list sorted by an industry label tells you what the market pays for chips in general, which says little about what it should pay for a parts supplier with two big customers.
A peer group is the set of companies you compare yours with on multiples. Choosing it is where most of the judgement in a comparable companies analysis sits, because the median of the wrong peers gives you a precise answer to the wrong question. Figures in this lesson are made up.
Good peers share three things with your company: how they make money, how fast they're growing and what can go wrong.
For Larkspur, that means precision manufacturers selling parts and modules to a few large equipment makers, paid per part, with demand that follows chipmakers' spending. The chip designer from the screen fails on business model, since it sells its own products to device makers. The equipment maker fails on position, because it's Larkspur's customer, with pricing power and a global service business Larkspur doesn't have. An SGX precision engineer that makes medical device parts passes the "precision engineering" label but fails on risk, because its demand doesn't follow the chip cycle at all.
Marcus ended with five peers, and he wrote one line for each on why it fits and one line for each rejected candidate on why it didn't. For every peer he recorded the same six figures in the same order: P/E, EV/EBITDA, P/B, free cash flow yield, revenue growth a year over five years, and operating margin.
Peer A, an SGX precision engineer that supplies chip equipment makers, scores 10.5, 6.0, 1.4, 6.5%, 6% and 12% Peer B, an SGX maker of parts for chip testing equipment, comes in at 13.0, 7.5, 1.9, 5.5%, 9% and 15% Peer C, a contract manufacturer for equipment makers listed on Bursa Malaysia, shows 18.0, 10.0, 2.6, 3.5%, 12% and 13% Peer D, a precision parts maker listed in Tokyo whose growth has been slow, shows 12.0, 6.5, 1.1, 5.0%, 4% and 10% Peer E, a US-listed supplier of whole subsystems to the same equipment makers, is the richest at 24.0, 14.0, 3.5, 3.0%, 11% and 14%
On the same basis Larkspur sits at a P/E of 11.4, EV/EBITDA of 6.25 and P/B of 1.7, with a free cash flow yield of 5.8%, growth of about 7.5% a year and a 14% margin.
A multiple from one company's annual report and another's data provider page may not measure the same thing, so before the numbers go side by side, line them up.
Use the same kind of earnings for all of them, either all underlying or all reported, as lesson 9.1, P/E, EV/EBITDA, P/B, P/S and FCF yield: what each measures, warned. Put leases on the same footing, which matters for Peer E, since it reports under US GAAP and lesson 9.2 showed how that moves EBITDA.
Align the financial years too. Peer D's year ends in March, while Larkspur's ends in December. To compare them, calendarise: build a December-year figure from the two March years it overlaps. Three months come from the year ending this March and nine from the year ending next March, so the calendar figure is a quarter of the first plus three quarters of the second. Without this step, in a fast-moving cycle you can end up comparing one company's boom year with another's slump.
Look at the P/E ratios by listing: the two SGX peers average 11.75, while the three overseas peers have a median of 18.
Some of that gap is business. Peers C and E grew faster, at 12% and 11% a year, so investors pay more for each dollar of today's profit. Some of it may come from the market itself. Smaller SGX companies trade thinly, are followed by few analysts and are too small for many large funds to own, as module 12 comes back to in lesson 12.7, Survivorship bias, SPIVA and where your edge is and is not. Investors who might need to sell in a hurry tend to demand a lower price for shares that are hard to sell, the illiquidity premium from lesson 2.7, Risk premia: what you are paid to hold equity, term, credit and illiquidity.
So a gap between Larkspur and Peer E isn't proof that Larkspur is cheap. Part of it is the price of being small and listed in Singapore, and that part may never close.
Now summarise the peer group. The mean P/E of the five is 15.5, while the median, the middle value once you sort them, is 13.
The gap comes from Peer E. At 24 times earnings it pulls the mean up by more than two points on its own. Apply each figure to Larkspur's underlying 14 cents a share and you get about S$2.17 from the mean and about S$1.82 from the median. One richly valued American company would add 35 cents to the answer if you used the average.
Medians resist outliers like that, which is why analysts use them for peer groups. With only five peers, though, check how far the median moves when you drop any one of them, because a peer group this small can hinge on a single name. Leave out Peer E and the median P/E falls to 12.5, a small move, so Marcus's group passes; a big jump would have meant the group was too small or too mixed to trust.
On the medians, EV/EBITDA of 7.5 times implies about S$1.93 a share for Larkspur, once net debt of S$20 million comes off. Both figures sit inside the central DCF range of about S$1.58 to S$2.08 from lesson 8.8, Value your modelled company with a DCF. The two methods agree, which is reassuring but not proof, since both carry the same view of the industry.
For the activity, list the five companies you'll compare yours with, at least two of them listed outside Singapore, each with one line on why it belongs.
Choose five peers for your modelled company, including at least two listed outside Singapore, and write one line on why each fits.
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