Is This New Blue Chip Stock A Cheap Share For Investors?

Credit: Ethan Lofton

Singapore’s stock market barometer, the Straits Times Index (SGX: ^STI), will see a change in three of its 30 constituents pretty soon.

In an announcement last week, the index’s co-creators – Singapore Exchange, Singapore Press Holdings, and FTSE Russell – said that Yangzijiang Shipbuilding Holdings Ltd (SGX: BS6), UOL Group Limited (SGX: U14), and SATS Ltd (SGX: S58), will be entering the index on 21 September 2015. They’d be replacing the trio of Jardine Matheson Holdings Limited (SGX: J36), Jardine Strategic Holdings Limited (SGX: J37), and Olam International Ltd (SGX: O32).

With SATS soon to become a blue chip stock (in Singapore’s context, the constituents of the Straits Times Index are often referred to as ‘blue chips’), there may be a spike in interest in the company from investors. As such, now may be a good time now to see how cheap or expensive the company’s shares actually are.

One way of valuing a stock is to look at its price-to-earnings (PE) ratio and compare it with its historical averages. Here’s what SATS looks like on this measure:

SATS's price-to-earnings ratio (PE ratio) from start of 2010 to 7 Sep 2015

Source: S&P Capital IQ

Based on its closing price of S$3.63 yesterday (7 September 2015), SATS, which does food catering and provides ground-handling services, is valued at 20 times its trailing earnings.

As you can observe from the chart above, SATS’s current valuation is near the highest it’s ever been over the past five-plus years since the start of 2010.

A high valuation need not necessarily mean that a share’s expensive. It can still turn out to be a screaming bargain if there’s sufficient growth in the share’s business. But in SATS’s case, there may be some cause of concern.

In the fiscal year ended 31 March 2008 (FY2008), SATS’ profit reached S$194.9 million; that became a peak which lasted some seven years till FY2015 when SATS managed to achieve a new record high profit of S$195.7 million.

Profit growth hasn’t been an easy thing to achieve for SATS in the past seven years. With SATS’ high valuation at the moment, investors who are interested in the company today would need to be confident that the firm can start growing its profits materially over the long-term.

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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 company mentioned.