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Are These Really Singapore’s Cheapest Shares?

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How do you determine whether a share’s cheap? Some investors like to examine a company’s earnings and cash flow and determine if the current price is too low or high in relation to how much the company can grow in the future.

For instance, such investors might point to the Straits Times Index’s (SGX: ^STI) trailing price/earnings (PE) ratio of 14 at its current level of 3,275 points and gauge how cheap or expensive the share market is with regard to the future change in the aggregate earnings of the index’s 30 constituents.

Meanwhile, other investors might prefer to look up a company’s balance sheet and see if its current share price would actually be lower than its net asset value (i.e. total assets minus total liabilities).

And for yet others, they’d take things one step further and find shares that are selling at a discount to their net current asset values (i.e. total current assets minus total liabilities). Such shares are sometimes known as great bargains because a company’s fixed assets like buildings, factories, and machinery would all come for free.

If you belong to the last group of investors, you might be very interested in the 92 shares in Singapore’s share market that were selling below their net current asset values (NCAVs) as of 22 June 2014.

Not all assets are created equal

But of course, not all of those shares would represent true bargains. In fact, it might also be prudent to be discerning about what makes up the current assets for those 92 shares.

In a company’s balance sheet, items like inventory and properties under development can be classified as current assets. However, those assets aren’t as dependable as cold-hard cash (assuming of course, that the company’s accounts are legitimately prepared) as their accounting value may well overstate their true monetary value.

In light of that, I’ve filtered the 92 shares to find those whose cash makes up more than 50% of their total current assets. 31 names came through, and the 5 with the highest cash percentages are shown in the table below.

Share Cash percentage NCAV* Market Capitalisation*
Changtian Plastic & Chemical (SGX: D2V) 96% 199 24
Chuan Hup Holdings (SGX: C33) 93% 227 271
China Fibretech (SGX: F6D) 92% 86 17
Lion Asiapac (SGX: L08) 84% 95 65
Foreland Fabrictech Holdings 82% 59 10
*Figures are given in S$, million

Source: S&P Capital IQ; Data as of 22 June 2014

Beware the value trap

So, are the five shares above some of Singapore’s cheapest high-quality shares? Honestly, it’s hard to tell due to two main issues:

1) Generally speaking, shares that sell for under their NCAV often have businesses in bad shape. Some of them might overcome their problems but some won’t. The issue here is that it’s hard to determine which share can eventually turnaround.

Some bargain hunters like the legendary Benjamin Graham preferred to scoop up most of such shares in the knowledge that statistically, a portfolio that consists of such under-priced shares would likely do well; that’s something to keep in mind for investors who are looking to pick individual companies from a list of shares that are cheap in relation to a certain permutation or combination of their asset values.

2) The market agglomerates the fears and hopes of countless market participants with regard to the future of a company. In certain instances, the market can fear that a share may potentially have accounting irregularities or worse, turn out to be an outright fraud, thus depressing the share’s valuation. Sometimes, those fears may be unfounded. But, there are times when those fears turn out to be true as well.

Foolish Bottom Line

All told, the onus is really on the investor to determine if the market’s current dour appraisal of the corporate futures (be it in terms of business performance or ethical malpractice) of the aforementioned 92 shares is an accurate reflection of their actual futures.

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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.