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This Dirt-Cheap Share May Not Be the Bargain It Seems To Be

When it comes to hunting for bargains, there are investors who would focus on a share’s assets. If the share’s available at a price that’s lower than the value of its assets net of all liabilities, then it may be a potential bargain.

The business trust Rickmers Maritime (SGX: B1ZU) would be one such stock. At its current price of S$0.22, it’s valued at just 0.3 times its latest book value (total assets minus total liabilities) per share.

For some perspective on how cheap that is, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund tracking Singapore’s market barometer the Straits Times Index (SGX: ^STI) – is carrying a price-to-book (PB) ratio of 1.2 at the moment.

But before you rejoice and sink right into Rickmers Maritime, here’s a word of caution. There can be a good reason why the business trust, which owns and operates containerships that are chartered or leased to shipping firms, is trading at what seems to be a deep discount to its intrinsic value.

Rickmers Maritime's book value per share

Source: S&P Capital IQ

Over the past few years, the trust’s book value per share has been steadily declining as seen in the chart above. In other words, if your assessment of the trust’s intrinsic economic worth is based on its asset value, then the trust has been a bona fide destroyer of value.

The future also looks murky for Rickmers Maritime. In the trust’s latest quarterly earnings release for the second-quarter of 2015, it commented that a number of its existing charter agreements will expire during the rest of the year. As there is “uncertainty surrounding the timing of a charter market recovery,” Rickmers Maritime’s earnings and cash flows may be negatively impacted if it signs new charter agreements that have less favourable terms.

Rickmers Maritime may look like a real cheap bargain based on superficial quantitative valuation metrics. But, its business may be sailing into some stormy seas ahead and that’s a risk that bargain-hunters have to be aware of.

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.