These 2 Companies May Be Some of Singapore’s Cheapest Blue Chip Stocks

Many of the blue chip stocks in Singapore – the 30 companies that make up Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI) – have fallen hard in recent months.

Their falls have culminated in the benchmark index closing at 3,193 points yesterday evening, some 10% lower than its 52-week high of 3,550 that was reached only in mid-April this year.

Stocks that have declined by large magnitudes can often seem like bargains in the eyes of investors. But, it’s worth noting that looking at price declines alone can’t tell us if a stock’s a bargain or not; a focus on the movement of the stock’s price in relation to its value is what’s more important.

With this in mind, the following are two blue chips which may be possible candidates for investing opportunites given that they are at their cheapest valuations over the past five-plus years since the start of 2010:

  • Singapore’s third-largest listed bank by total assets, United Overseas Bank Ltd (SGX: U11); and
  • Rig-building and property development conglomerate Keppel Corporation Limited (SGX: BN4).

UOB's PB ratio from start of 2010 to 3 August 2015

Source: S&P Capital IQ

The price-to-book (PB) ratio, where a company’s share price is divided by its total equity (total assets minus total liabilities), can be a good proxy for the intrinsic business value for a financial institution like a bank.

As Chart 1 above shows, UOB’s PB ratio of 1.15 as of yesterday’s market close is the lowest valuation the bank has carried for the timeframe we’re looking at.

Keppel Corp's PE ratio from start of 2010 to 3 August 2015

Source: S&P Capital IQ

Meanwhile, Keppel Corp’s also in a similar situation with UOB – but this time, it’s the conglomerate’s price-to-earnings (PE) ratio on 3 August 2015 that’s at the lowest it’s ever been for the period we’re observing.

The low valuation that the two blue chips currently carry may help set the stage for a mean-reversion to occur. In investing, a positive mean-reversion manifests in how below-average valuations often result in above-average outcomes.

That being said, it’s worth noting that cheap-looking stocks can also become expensive nightmares if their businesses deteriorate in the future.

There are some risks to note with the two shares.

UOB’s latest second-quarter earnings saw its profit suffer a year-on-year decline for the first time since the fourth-quarter of 2011. The bank’s book value per share also saw a slight dip on a sequential basis in the reporting quarter.

As for Keppel Corp, the company’s facing pressure on multiple fronts with a prominent issue being the weak business environment in the oil & gas sector which has dampened orders for rigs.

In the second-quarter of 2015, Keppel Corp’s revenue fell hard by 19% compared to a year ago. The firm also ended the quarter with an orderbook of US$11 billion for its offshore & marine segment, a notable 22% decline from a year ago.

A Fool’s take

Stocks with cheap valuations can be great starting points for investors who are out looking for investing opportunities. But, a careful consideration of the risks and future business prospects for such stocks will also be needed in order to filter out the value traps. These thoughts apply for Keppel Corp and UOB too – the two blue chips have enticing valuations now, but more digging will have to be done before any investing decision can be reached.

Like talking about bargain hunting? If you do, then come meet David Kuo and the rest of the Fool Singapore team on August 15! 

Please join us at Invest FAIR Singapore on 15 August. (Suntec Centre, Booth B-16). Come chat with us at our booth, and see our MAS-licensed Director, David Kuo, give his official SGX investor presentation.

You won't want to miss this! Add Invest FAIR Singapore to your calendar today.

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.