Where Is The Value In the Shipbuilding Industry?

If you look at the biggest players in the shipbuilding industry you might find a handful of stocks that are largely unloved. The six largest stocks in the industry are trading at roughly 11% above their 52-week lows. 

Finding a stock that is being shunned by other investors can be a godsend to a value investor, who is constantly on the hunt for shares that have been discounted by the markets.

So the question surrounding shipbuilders is why. Why are they trading at such low prices? Is it justified or do they hold greater value than their current share prices might suggest?

Keppel Corporation (SGX: BN4) is capitalized at S$13.5b. It is by far Singapore’s largest shipbuilder.

Whilst its share price of S$8.73 is only 10% above its 52-week low, its price-to-earnings multiple of 12.5 and price-to-book of 1.5 could suggest that the Straits Times Index (SGX: ^STI) component deserves to be priced at around this value. The main attraction of Keppel is its generous dividend yield of 5.5%.

The only other blue-chip shipbuilder is Sembcorp Marine (SGX: S51). However, its price-to-earnings of 15 and price-to-book of 2 are similarly not indicative of a typical value share. 

Perhaps the only stock out of the six to possess a price-to-book below one could offer some value?

That company would be COSCO Corporation (Singapore) Limited (SGX: F83), which trades at a 10% discount to its book value.

Its share price of S$0.52 is also only 3% above its 52-week low. Once again, this company fails to have all the hallmarks of a good value share. Its P/E ratio of 63 is high and could be attributed to poor bottom-line profits and top-line revenues over the last few years. A dividend yield of only 1.9% is also unlikely to impress.

The stocks in the shipbuilding industry, whilst priced cheaply compared to recent historical values, seem expensive when we examine some of their key ratios. 

It would appear that they have found themselves priced near recent lows due to a lack of activity within the industry, which in turn has impacted profits. By investing in these stocks a value investor is hoping that the shipbuilding industry might pick up soon. For taking on this risk, a value investor might want a larger margin of safety than is currently available.

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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.