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Singapore’s Most Undervalued Blue Chip Company

Having previously looked at Singapore’s Most Overvalued Blue Chip, it was found that there was one clear winner when using the price-to-book (P/B) ratio as the main criterion.

The race for the title of Singapore’s Most Undervalued Company, however, is somewhat closer.

As a reminder, value investors look for companies with a price-to-book ratio of less than one, since it provides them with a margin of safety. If a company is selling below its book value, then it could, theoretically, be broken up profitably into its various components to reap a reward for investors should things go pear-shaped.

So, which of Singapore’s Straits Times Index (SGX: ^STI) components have a favourable Price-to-Book in the eyes of value investors? And why would they think they are attractive?

Five of the 30 components have a P/B ratio below one. Of these,  Jardine Strategic Holdings Limited (SGX: J37) could possibly be discarded, since its P/B of 0.93 does not provide a huge margin of safety.

If we take the sage advice of value investor Warren Buffet, then Singapore Airlines Limited (SGX: C6L) might not be worth closer inspection either, since investing in airlines could be a recipe for disaster.

Of the remaining three, Golden Agri-Resources Limited (SGX: E5H) and Hongkong Land Holdings Limited (SGX: H78) offer the largest margin of safety with price to book ratios of 0.58 and 0.6 respectively. CapitaLand Limited (SGX: C31) is the last company amongst the five with a P/B of 0.85.

So why are their P/B ratios less than one? Does the market actually believe that the asset values of these companies have been overstated. Alternatively, have the companies been providing investors with disappointing Returns on Equity (RoE)?

A quick look at the RoE of the three companies appears to suggest that it is could be a case of the latter. The Return on Equity, which is the percentage of the profit a company generates on total shareholders equity employed in the business, do not look overly compelling.

Golden Agri-Resources, Hongkong Land and CapitaLand have ROEs of 3.3%, 4.3% and 4.3%, respectively. This is significantly below the RoE of 7.5% for Singapore’s blue chips.

There is little to choose between the three companies based on their Returns on Equity. But the wider margin of safety afforded by the Price-to-Book values of Golden Agri-Resources and Hongkong Land suggests that they could be worth further investigation.

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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.