Page 10 - Valuation in Abnormally Uncertain Times

It is obvious that the 10-year and 20-year Singapore Government bond rates are now at their
lowest in history. To mitigate the abnormal low level of the risk free rate, a “normalisation”
adjustment can be considered. As a proxy for a normalised risk free rate, we have computed the
moving average of the 10 year and 20 years Government bond rates. Data is available since 1998
for the 10 year rate and the moving average is 2.69%. Measured over the past 10 years, i.e. since
2011, the moving average is 1.96%. For the 20 year rate, data is available from 2007 and the moving
average is 2.59%. Measured over the past 10 years, i.e. since 2011, the moving average is 2.38%.
Based on this a normalised risk free rate would be in the range of 2.0% to 2.5%.

Given the current unprecedented low levels of Singapore Government bond rates of around 1.0%,
currently it could be considered applying a “normalised” level of 2.0% to 2.5% as representative for
the level of a long-term risk free rate based on the average interest rate levels during the past 10-
20 years. As an alternative to "normalising" the risk free rate from the current rate of about 1.0%, it
can be considered to increase the Market Risk Premium by 100 to 150 basis points and utilise the
current risk free rate.

Risk Premium for COVID-19
In Section One, we looked at the Earnings Yield and the change in the Earnings Yield as a proxy for the
impact that the COVID-19 crisis have had on the required returns on equity. We set out the change in
the Earnings Yield for the ListCos or the “market” as a whole below as at 31 March and 30 April 2020:

Change in Earnings Yield by Industry 31 March & 30 April 2020

"Market" 0.8%
1.6%

Utilities 4.6%
5.4%
Real Estate 1.0%
1.7%
Materials 1.6%
1.1%
Information 1.4%
Technology 2.5%
Industrials 0.6%
1.3%
Health Care 0.0%
0.3%
Financials 1.1%
0.9%

Energy 3.0%
0.9%
Consumer 1.3%
Staples 1.8%
Consumer 0.7%
Discretionary 1.7%
Communication 2.4%
Services 3.6%
0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%
31/03/2020 30/04/2020

Source: Based on data from CapitalIQ

The overall impact on the market median Earnings Yield was 1.6% as at 31 March 2020 and 0.8% as
at 30 April 2020. Given these medians, we would consider adding 75 to 175 basis points to the cost
of equity post COVID-19. However, variations between industries will matter as can be seen.
10 RSM