The stock market has fallen hard over the past year – that should be nothing of a surprise for most of you. But, what may not be well-known is that there are some stocks within the Straits Times Index (SGX: ^STI) – the hallowed blue chips in Singapore – that have much lower valuations now as compared to their cheapest points during the Great Financial Crisis of 2007-09. Two such blue chips are the oil-rig builder Sembcorp Marine Ltd (SGX: S51) and the palm oil and sugar producer Wilmar International Limited (SGX: F34). Source: S&P Capital IQ; author’s…
The stock market has fallen hard over the past year – that should be nothing of a surprise for most of you.
But, what may not be well-known is that there are some stocks within the Straits Times Index (SGX: ^STI) – the hallowed blue chips in Singapore – that have much lower valuations now as compared to their cheapest points during the Great Financial Crisis of 2007-09.
You can see in the table above how the two stocks are currently carrying price-to-book (PB) ratios that are a fair bit lower than during the crisis episode.
As a reminder, the financial crisis period was a great time for bargain hunting, with the Straits Times Index up by 85% currently (even after the index’s on-going hard fall) from its crisis-trough of 1,455 points that was reached on March 2009.
So, on the surface, it seems that investors may be getting some potentially exceptional bargains with Sembcorp Marine and Wilmar International. But – and this is a crucial but – there are some important risks to note.
(In general, the following type of analysis may also be useful when you’re looking for bargains on the basis of a stock carrying a historically low PB ratio.)
The chart above illustrates how the trailing-12-month (TTM) earnings and TTM returns on equity for Sembcorp Marine and Wilmar International have changed since the first-quarter of 2009. I’d like to point out that both companies have seen their earnings fall and returns on equity shrink over the past few years.
What this means is that both companies have become less adept at utilising their shareholder’s equity to generate a profit – and that could well be a reason for their lower PB ratios now since their assets may no longer be as economically valuable as in the past.
Of course, both Sembcorp Marine and Wilmar International may just be caught up in a temporary down-cycle in their respective businesses – and if that really is the case, then their current valuations may make them attractive bargains when the cycle turns.
But if the changes to the economic characteristics of their businesses have been altered permanently, then a return to the higher PB ratios of the past may not occur and they may end up not being bargains after all. That’s something to think about for prospective and current investors of Sembcorp Marine and Wilmar International.
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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 companies mentioned.