I like buying undervalued companies. As such, a lot of my time is spent searching for them. Now, there are many ways to go about doing that, and most readers will have some ways that they use to search for bargains. One way I do so is to study companies that are trading below their book value. The book value of a company, which is also known as the equity, is calculated by subtracting its total liabilities from its total assets.
Book Value = Total Assets – Total Liabilities
In other words, for a company to appear on my…
I like buying undervalued companies. As such, a lot of my time is spent searching for them.
Now, there are many ways to go about doing that, and most readers will have some ways that they use to search for bargains.
One way I do so is to study companies that are trading below their book value. The book value of a company, which is also known as the equity, is calculated by subtracting its total liabilities from its total assets.
Book Value = Total Assets – Total Liabilities
In other words, for a company to appear on my radar, its stock price must be lower than its per share equity.
For some investors, such a method of searching for undervalued investments is futile, since most cheap companies are cheap for good reasons. They are cheap – but not undervalued.
But, finding for stocks that have prices below their book value is still a great way to find potential ideas, especially if you can manage to find blue chip companies at such valuations.
In this article, I will look at two examples.
The first is Sembcorp Industries Limited (SGX: U96).
For those who are new to the company, Sembcorp Industries is a conglomerate with three major business segments: Utilities; Marine; and Urban Development & Others. The Marine segment’s contribution mainly comes from Sembcorp Industries’ 60.99% stake in oil rig builder Sembcorp Marine Ltd (SGX: S51).
Sembcorp Industries’ stock price has fallen about 40% in the last five years mainly as a result of the decline in oil prices that started in 2014. Lower oil prices have affected Sembcorp Marine’s business badly (the company’s profit in 2016 is 86% lower than in 2014). Though oil prices have recovered to around US$50 per barrel today from a recent low of less than US$30, it’s still significantly below the level of over $100 per barrel seen in 2014.
As such, Sembcorp Industries has lost favor among investors, causing it to trade at a low price-to-book ratio of just 0.84 at current prices.
The next example here is Hongkong Land Holdings Limited (SGX: H78). The company is part of the sprawling empire of conglomerate Jardine Matheson Holdings Limited (SGX: J36), which owns substantial stakes in many other Singapore-listed companies that include Mandarin Oriental Limited (SGX: M04), Jardine Cycle & Carriage Ltd (SGX: C07), and more.
Hongkong Land is mainly involved in the property development, investment, and management business. Its property businesses are spread across China, Southeast Asia and its home base of Hong Kong. The company’s most important business interest is its ownership of 12 prime retail/commercial buildings in the Central district of Hong Kong.
Unlike Sembcorp Industries, Hongkong Land’s stock price has grown by nearly a quarter in the last five years, tagging along with the growth of its book value per share. Yet, despite the increase in its stock price, the company’s price to book ratio is still relatively low, compared to the market, at 0.56.
One thing here that investors should note is that it is very common for property companies to trade below their book value. In fact, another local blue-chip property company, CapitaLand Limited (SGX: C31), is also trading below its book value.
A Foolish conclusion
So Sembcorp Industries and Hongkong Land are two blue chip companies that are trading below their book value. Although both have low price-to-book ratios, their stock prices and business performances over the past five years have been quite different.
From here, investors should carry on their own further research on the two blue chips before committing any of their personal capital.
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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 contributor Lawrence Nga doesn’t own shares in any companies mentioned. The Motley Fool Singapore has a buy recommendation for Hongkong Land Holdings.