Singapore’s Most Overvalued Blue Chip: StarHub Limited

The price to book (P/B) ratio of a company is the ratio of its market price over its book value. The book value of is the value of a company’s net assets.

This seemingly simply ratio has and continues to be used by value investors to identify low-priced stocks that could, for whatever reason, be unloved by the markets.

Typically, value investors look for companies with a price to book ratio of less than one. However a P/B of less than one is not the be all and end all of things.

A P/B of less than one could arise for two reasons. The first is that the market might believe that the assets on a company’s books could be overstated. These should be avoided since the asset value may be subjected to a downward revision at some stage.

Interestingly, the second and perhaps more appealing scenario to a value investor is where the company has been earning a poor return on its assets. In this case, value investors could be hoping that either new management or improved business conditions could prompt a turnaround in fortunes.

Even if this isn’t the case, and positive returns are not achieved, the favourable price to book could provide value investors with a margin of safety. In the worst case, the company could be broken up and the sum total of its assets could be sold off for a profit.

A high Price-to-Book value is something that value investors would avoid. And amongst Singapore’s blue chips, one company stands out as possibly the most overvalued in terms of its P/B ratio.

That company is StarHub Limited (SGX: CC3) with a whopping P/B ratio of 74. This is some way ahead of the second most overvalued company Singapore Exchange Limited (SGX: S68) with a price-to-book ratio of 9.5.

This does not mean, however, that Starhub should be avoided at all costs by every investor. Some investors could even see StarHub as attractive. They just might not be value investors.

StarHub’s high P/B is due primarily to its high debt level. In other words, the company makes use of debt rather than equity to finance its business. It is thanks to the debt financing that StarHub is able to deliver an extraordinarily high Return on Equity of 388% to investors.

Whilst the Price-to-Book admittedly has its limitations, it remains a cornerstone for value investors to identify possibly undervalued or overvalued companies.

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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 contributor Adam Kuo doesn’t own shares in any companies mentioned.