These Beaten-Down Shares Might Not Be Bargains

Over the 12 months ended 1 Dec 2014, Singapore’s market barometer, the Straits Times Index (SGX: ^STI), has delivered a pedestrian price gain of just 4.07%.

Such a return would not be exciting for most investors, but it’s still miles better than what investors in Yeo Hiap Seng Ltd (SGX: Y03) and Biosensors International Group Ltd (SGX: B20) would have gotten.

Share Price change from 1 December 2013 to 1 December 2014
Yeo Hiap Seng -28.5%
Biosensors -46.6%

Source: S& Capital IQ

The former’s a property developer and beverage brand owner active predominantly in Singapore and Malaysia. Meanwhile, the latter’s a stent maker (a stent is a medical device used to help unclog arteries to aid the smoother flow of blood) that counts China and Japan as its major geographical markets.

With the way both shares have been beaten-down over the past year, is it a good time for investors to go bargain hunting? Turns out, a quick glance at their valuations seems to suggest otherwise.

As of 1 December 2014, Yeo Hiap Seng and Biosensors are carrying trailing price/earnings (PE) ratios of 33, and 21 respectively. In comparison, the SPDR STI ETF (SGX: ES3) is valued at around 13.6 times its training earnings only; the SPDR STI ETF is an exchange-traded fund which tracks the Straits Times Index.

The higher-than-average valuations that both shares have implies that the market’s looking out for above-average growth rates in earnings from them. If they can’t deliver, then their valuations would likely shrink further, causing even more pain for investors.

Although we should never extrapolate the immediate past indefinitely into the future, both companies’ recent business performance certainly can’t inspire much confidence from investors.

Share Year-on-year change for earnings over the last 12 months
Yeo Hiap Seng -58.2%
Biosensors -58.5%

Source: S&P Capital IQ

In Yeo Hiap Seng’s latest third quarter earnings release, the company gave investors even more room for pause regarding future earnings growth when it wrote the following comment:

“The continued increase in raw material prices and energy costs, coupled with continued pressure on sales and selling prices due to intense competition will put pressure on [Yeo Hiap Seng’s] earnings for the Food and Beverage division. Nevertheless, the [company] expects its 2014 earnings for Food and Beverage to be satisfactory.”

Yeo Hiap Seng appears to have no problems with making a profit, but when its shares are priced at a premium, “satisfactory” might not make the cut.

As for Biosensors, the company wrote about “sustained softness in its overall business that was more severe than expected” in its latest quarterly earnings announcement. The company’s taking steps to improve its operational efficiency to drive further growth, but it remains to be seen if its measures are sufficient.

A Fool’s take

None of the above is meant to say that both companies would make for poor investments going forward (after all, strong improvements in their business operations might well cause their share prices to grow again). Instead, it’s meant to highlight that shares do not automatically become an opportunity for bargain hunting based on a decline in their prices alone.

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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.