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At What Price Would Benjamin Graham Buy Genting Singapore?

Value investing is all about finding stocks that are priced less than their intrinsic worth. Every investor has their own method of determining the intrinsic value.

Benjamin Graham, widely regarded as the founder of value investing, has his own set of criteria.

One of his criteria was that the earnings yield, the inverse of the P/E ratio, should be at least twice the yield on a triple-A bond. With the 10-year US Treasury currently at 2.4%, we should ideally be looking for an earnings yield coming close to 5%.

Genting Singapore PLC (SGX: G13), the operator of Resorts World Sentosa, has an earnings yield of 4%. On this measure Genting would seem overpriced.

In terms of its earnings yield, there are two ways that Genting could fall into the bracket of a value share. Firstly, its earnings could rise and inefficiencies in the market could lead to Genting becoming attractive.

Alternatively, for Genting to have a more appealing earnings yield its share price would have to fall by around 20%. This corresponds to a share price of around $0.90 or a fall of nearly 22 cents from its current price.

Perhaps a better measure is the price-to-book value, since the book value gives a good measure of the underlying value of a company. Genting has a price-to-book ratio of around 1.4. An ideal value share would be priced below its book value, that is it should have a price to book ratio of less than one.

To bring Genting’s price to book ratio down to one the share price would now have to fall to S$0.81 cents a share. This represents a hefty reduction of nearly 30% from its current value.

There are many other factors that need to be considered. For instance Graham placed an importance on finding a company that could demonstrate positive growth in its net income over the last five years. Genting achieved this until 2013.

Similarly there are measures of a company’s risk which need to be explored, too. A current ratio of two is preferable since it suggests the company is able to manage its debt obligations. A healthy balance sheet confers Genting with a current ratio of over 4.

Whilst Genting may meet some of the criteria Graham laid out when searching for a value share, its current price might be too inflated. With all other factors remaining constant, value investors are unlikely to be tempted in unless Genting’s share price falls below the S$1 mark.

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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.