MENU

Three Cheap Blue Chips?

There are many different ways to value a company and the Price-to-Sales (PS) ratio is one of them. As its name implies, the PS ratio simply measures the number of dollars that the market is awarding to each dollar of revenue a company brings in.

Like with most other valuation measures, a low PS would generally mean a company’s less-expensively valued than one with a high PS (it’s also important to point out here that context is very important and rules-of-thumb can sometimes be meaningless for individual cases).

On that front, here are three of the cheapest blue chips within the Straits Times Index Times (SGX: ^STI) 30 constituents when measured using the PS ratio: Noble Group (SGX: N21), Olam International (SGX: O32), and Wilmar International (SGX: F34).

Company

Price PS Ratio

Noble Group

S$1.29

0.07

Olam International

S$2.22

0.26

Wilmar International

S$3.49

0.40

Median PS Ratio for Straits Times Index

3.00

Source: S&P Capital IQ

All three companies have businesses revolving around commodities, though each has its own niche. For Noble, its forte lies is in the supply and distribution of energy products like oil, gas, and coal. Olam on the other hand is the largest distributor of nuts and spices in the world. With Wilmar, its specialty is in palm oil and it actually supplies more than 50% of China’s palm oil consumption.

Being in the commodities industry isn’t the only common denominator for the trio though. Over the past few years, the three companies have all experienced declining profit margins and that could be a reason to explain their excessively low PS ratios: Noble’s profit margins dropped from 1.07% in 2010 to a razor-thin 0.25% in 2013; Wilmar’s margins declined from 4.36% to 2.99% in the same period and; Olam’s margins got squeezed from 3.38% in June 2010 to 1.74% in June 2013.

All told, it’s not pretty when looking at their margins. But, here’s where contrarian investors might be interested. Firstly, the profit margins at these companies have been cyclical in nature. As an illustration, Noble’s profit margin peaked at 3.35% in Nov 2004, dropped all the way to 0.9% in Aug 2006, before rising to 2.15% again in 2009. Secondly, revenue at the trio has been growing really quickly, as seen in the table below. Lastly, if we put two-and-two together, we can see how there might be room for huge profit growth for the three companies in the future if profit margins expand while revenues continue growing.

Company

Revenue: 2010*

Revenue: 2013*

% Change

Noble Group

US$56.7 billion

US$97.9 billion

73%

Olam International

S$10.6 billion

S$20.8 billion

95%

Wilmar International

US$44.1 billion

US$30.4 billion

45%

*For Olam, the time periods are for June 2010 and June 2013

Source: S&P Capital IQ

Of course, it’s a big assumption to make regarding any future expansion in profit margins so that’d be a call each investor has to make on their own. But in any case, the low PS ratios that Noble, Olam, and Wilmar sport might be a potentially attractive hunting ground for investors with a contrarian bent.

Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool's free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.  

The Motley Fool's purpose is to help the world invest, better. Like us on Facebook  to keep up-to-date with our latest news and articles.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.