Is Upcoming Blue Chip Stock UOL Group Limited A Bargain?

On 21 September 2015, Singapore’s market barometer, the Straits Times Index (SGX: ^STI), will see three of its constituents change.

The outgoing trio, namely Jardine Matheson Holdings Limited (SGX: J36), Jardine Strategic Holdings Limited (SGX: J36), and Olam International Ltd (SGX: O32), will be replaced by Yangzijiang Shipbuilding Holdings Ltd (SGX: BS6), UOL Group Limited (SGX: U14), and SATS Ltd (SGX: S58).

With UOL Group being an upcoming blue chip (in Singapore, the term ‘blue chips’ is often used to refer to the 30 constituents of the Straits Times Index), now may be a good time to look at whether it’s a cheap stock or not.

UOL Group’s in the business of developing residential real estate and investing in commercial, retail, and hospitality properties. Given the nature of its business (which is asset-heavy), a suitable valuation metric could be the price-to-tangible-book-value (P/TBV) ratio. A comparison of this ratio with its historical averages could give investors some insight on how cheap or expensive UOL Group is.

Here’s how things look like at the moment:

UOL Group's price-to-tangible book value ratio (PTBV ratio) from start of 2010 to 8 Sep 2015 (2)

Source: S&P Capital IQ

From the chart, I trust it’s obvious to see that UOL Group’s shares are near the cheapest it’s been over the past five-plus years since the start of 2010. In investing, below-average valuations bring about the strong possibility of above-average outcomes in the future.

But, that’s far from a given. Investor Ric Dillon explains:

“On the behavioural-finance side, one of many inefficiencies comes from people anchoring on the past. People assume something is cheap, say just because it hasn’t traded at such a low valuation for five or ten years. But that doesn’t matter, what matters is what will be.”

Said another way, the future business performance of a share is also a very important influence in the eventual outcome of how its shares perform. In UOL Group’s case, it would have to be able to continue building its tangible book value.

UOL Group’s admirable track record (see table below) lends testament to how it has been a solid operator in its field of business.

UOL Group's per-share tangible book value growth

Source: S&P Capital IQ

The only question is: Can UOL Group continue growing its tangible book value? As you can see, growth has slowed in recent years (from the high-twenties to the low-teens). From a valuation standpoint, UOL Group may be deemed to be a cheap share. But it’d pay for investors to carefully consider the company’s future prospects too.

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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.