"Low-interest rates may also lead to NLT’s regulatory weighted average cost of capital (WACC) for the next review period (Jan 2023-Dec 2027) to be revised down from 7% currently, adversely impacting distributions potentially. In addition, there is no visibility on any acquisition by NLT which could be positive catalyst in the long term."
" A high weighted average cost of capital, or WACC, is typically a signal of the higher risk associated with a firm's operations. Investors tend to require an additional return to neutralize the additional risk. ... In theory, WACC represents the expense of raising one additional dollar of money. "
The WACC formula is as such
Basically is the weighted amount of Equity Cost and Debt Cost.
Cost of Debt
2.87% of 509,120k and 1.2% 155,587k
= Weighted will be (14,612k + 1,867k ) /664707k
= 2.48%
Cost of Debt Variables
Gross debt 666M
Market Cap 3683M
Tax rate 17%
CAPM
CAPM model to estimate cost of equity.
Cost of Equity
Let's say Risk free rate 1.53% per Singapore Saving Bond
Expected Rate of return say 8.3%. ( 5.34% yield + 3% growth )
Cost of Equity = 1.53% + 0.3 x ( 8.34% - 1.53% ) = 3.573% ( 8.34% for Beta = 1 )
The calculation of Beta is tricky. Who should we use as reference for NLT ? Should we use STI Index ? Since NLT listed in Year 2017, their stock price has raised more than 21% compared to STI -1.3%. Yahoo put NLT beta as 0.3. Some other put 0.5. This one need another article to think about and compute !
If we assume Beta = 0.3, plug in all this data into the model, we have
WACC = Weighted ( Cost of Equity + Cost of Debt )
= 3683M x 3.573%/(666M+3683M) + 666M x 2.48% x (1 - 17%) / (666M + 3683M)
= 131.59M/4349M + 16.52M x 0.83/4349M
= 0.03 + 0.00315
= 0.03315 or 3.315% ( or 7.3% for Beta = 1 )
Below is NLT model. There are other moving wheels such as Depreciation and Opex for Rev determination.
Interesting Exercise. However this is my First pass. Please DYODD.
Cory
2021-0606
Articles in this Blog is personal take and educational purposes only. Reader should seek their own professional help when making financial decision and be responsible for their decision.