This Extremely Cheap-Looking Share Might Not Be a Bargain After All

For investors trawling through the list of the market’s cheapest shares, frozen fish supplier Pacific Andes Resources Development Ltd (SGX: P11) would likely pop out – at its current price of S$0.062, the company carries a stunningly low price/earnings (PE) ratio of 1.9.

To put Pacific Andes’ valuation into perspective, the SPDR STI ETF (SGX: ES3) is almost seven times as expensive with a trailing PE ratio of 13.4. The SPDR STI ETF is an exchange-traded fund which tracks Singapore’s market barometer, the Straits Times Index (SGX: ^STI).

Pacific Andes’ low valuation right now might make it seem like a no-brainer for the bargain hunter – what can go wrong with such a low valuation? Turns out, plenty can actually go wrong.

Believe it or now, but the last time Pacific Andes carried a similar PE ratio was back in late November and early December 2008 during the throes of the Great Financial Crisis (the company had a PE ratio of 2.1 at that time).

The difference between now and then is that Pacific Andes was priced at S$0.14 a share at the start of December 2008. So, investors who had jumped on what looked like an incredible bargain back then would now be sitting on losses of some 57%.

Pacific Andes share price and PE ratio

Source: S&P Capital IQ

From December 2008 to today, Pacific Andes’ earnings per share had declined from 6.825 Singapore cents to just 3.265 cents. The economics of the company’s business had also declined tremendously, as seen in the sharp drops in the firm’s returns on equity despite the use of lots of leverage (the company’s total debt to equity ratios have been really high).

Pacific Andes ROE and TDE ratio

Source: S&P Capital IQ

Pacific Andes’ sinking earnings and poor economics have likely been the big driver for its share price decline despite having a dirt-cheap price back then. It is a great reminder for investors that a cheap share can become an expensive loser as well if its business deteriorates.

A Fool’s take

If we go back to December 2008, it might have been tough to foresee problems with the company given that it had been growing its revenue and earnings very quickly and had at least decent economics. But, the situation’s different now – yes the share’s cheap, but the company’s business doesn’t look attractive at all.

I’m not saying that management can’t turn things around. But for investors who think Pacific Andes represents a great bargain because it’s trading at such a low valuation, they’d have to have faith that management really can turn things around and improve the economics of the firm’s business going forward.

If Pacific Andes’ business remains poor, this cheap-looking share might turn out to not be a bargain after all.

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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 company mentioned.