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Here Are 5 Of Singapore’s Cheapest Blue Chip Shares

There are many ways to value a stock and one popular method is to focus on its book value. The book value of a company is the cash that can theoretically be returned to its shareholders after the firm liquidates all its assets and settles all its obligations.

Mathematically, the book value’s given in the formula below:

Book value = Total assets – Total liabilities

Companies with a price-to-book ratio of below 1 are selling for lower than their book values and investors who are able to buy such shares are therefore getting their hands on a potential bargain.

With this in mind, the quintet of Golden Agri-Resources Ltd (SGX: E5H), Noble Group Limited (SGX: N21), Hongkong Land Holdings Limited (SGX: H78), Jardine Strategic Holdings Limited (SGX: J37), and CapitaLand Limited (SGX: C31) might rightfully be called Singapore’s cheapest blue chips; they have the lowest PB ratios (see table below) amongst the 30 constituents of Singapore’s market barometer, the Straits Times Index (SGX: ^STI).

(In Singapore’s context, shares which are part of the Straits Times Index are often referred to as the blue chips; they’re amongst the largest companies in Singapore by way of market capitalization.)

Golden Agri, Noble, Hongkong Land, Jardine Strategic, CapitaLand book value

Source: S&P Capital IQ

Besides looking at their current book value multiple, we can actually take the analysis one step further and see how their present valuation stacks up against their long-term average PB ratios.

Golden Agri, Noble, Hongkong Land, Jardine Strategic, CapitaLand book value and book value average (2)

Source: S&P Capital IQ

As the table immediately above shows, Golden Agri-Resources and Noble are likely to be the ones most likely to catch the eye of bargain hunters amongst the group of five: They not only occupy the first two positions in the low-PB-ratio race, their current PB ratios also represent huge discounts to their respective long-term average valuations over the past five years.

But, none of the above necessarily mean that Golden Agri-Resources and Noble, as well as the other three low PB blue chips, will be great investments going forward. While they might have a cheap valuation, there’re still risks to note.

For instance, how certain are we that their asset values aren’t overstated?

Let’s take Golden Agri-Resources as an example. As of 31 March 2015, nearly 50% of the company’s total assets of US$14.6 billion are made up of biological assets which are pegged to be worth US$7.92 billion. This is how the company, whose main business lies in palm oil production, calculates the value of its biological assets, as seen in its 2014 annual report:

“The [company] determined the fair value of biological assets using the discounted cash flow method. The key assumptions for the discounted cash flow calculations are those regarding the average lives of plantations, yields per hectare, extraction rates, discount rates, expected changes in CPO and palm kernel prices and direct costs during the period.”

The details for the assumptions are given in the annual report as well but the key thing to note here is that there are many moving parts to the biological assets equation and investors need to be comfortable with them. Otherwise, adjustments may be necessary.

This holds for every company mentioned here (in fact, it’s the same for any company we might be looking at) – it’s important to look beneath the hood as a share that looks cheap on a low PB basis might yet turn out to be an expensive mistake if its assets turn out to have been recorded at inflated values.

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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.