Could These 2 Small Cap Stocks Be Overvalued?

In a previous article, I wrote about some blue chips in Singapore that were selling for less than half their tangible book values and looked at whether they were real bargains or not.

In here, I’d like to mix things up a little. Let’s take a look at companies with small market capitalisations of less than S$200 million, but which have a price-to-tangible book (PTB) ratio of more than 20, and ask an important question: Are they massively overvalued?

A soft-skills whiz

At its current share price of S$0.60, Boardroom Limited  (SGX: B10) has a market cap of just S$116 million. Its PTB ratio, on the other hand, is a whopping 114.

Boardroom’s a provider of professional business services like corporate secretarial, share registry, and business advisory. The firm has a business presence in a number of countries including Singapore, Malaysia, Australia, and China.

As of 30 June 2015, Boardroom had a total book value of S$69.1 million. But, with the firm having S$68.1 million in intangible assets (like goodwill from past acquisitions, for instance), its tangible book value is just a paltry S$1 million. That’s how Boardroom has ended up with a PTB ratio in the triple-digits despite having a tiny market cap.

In most companies, a triple-digit PTB ratio may be a yellow flag for an overvalued stock. But as Boardroom is a knowledge-based business, most of its economic value does not come from the physical assets that it owns; instead, the value comes from the company’s relationship with its customers, its brand name, and the knowledge and skills of its employees.

From other angles, the company does have a reasonable valuation. For instance, Boardroom’s profit of S$6.8 million for the 12 months ended 30 June 2015 gives it a price-to-earnings ratio of around 17 – that’s not egregiously high.

The fisherman

Another small cap here is Pacific Andes Resources Development Ltd (SGX: P11), a fishing company that produces, markets, and distributes, fish and fishmeal products. It has a market cap of S$198 million at its current share price of S$0.02.

As of 28 June 2015, Pacific Andes had a total book value of HK$16.9 billion; but with HK$12.5 billion in intangible assets, the company’s actually valued at 21 times its tangible book value.

But unlike Boardroom, Pacific Andes  has to own significant physical assets in order to run its business. For instance, the company has to operate fishing fleets, own processing plants, and hold inventory in order to ensure its business runs smoothly. Tangible book value is thus a more relevant metric to gauge the value of Pacific Andes than it is for Boardroom.

Foolish Summary

We have just seen two small caps that are trading at significantly higher levels than their tangible book value. And what’s interesting here is that we get to see just why we should not use just one ratio to guide our thinking for all types of businesses.

As each type of business is different, we have to first understand its economics before coming up with suitable metrics to value it. Blindly using one ratio to value all companies may result in trouble. To a man with a hammer, everything looks like a nail. Carry other tools around.

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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 Stanley Lim doesn’t own shares in any companies mentioned.