In January this year, my Foolish colleague, Chong Ser Jing, ranked all the stocks in the Singapore stock market according to the Magic Formula, an investing strategy made popular by investor Joel Greenblatt in his book, The Little Book That Beats The Market. Ser Jing wanted to find the 30 best stocks in Singapore for 2018 based on the formula.
To apply Greenblatt’s strategy, we should buy the 30 stocks from the list and hold them for a year. However, the value investors among us might be looking for the really cheap stocks out of the 30 companies to add to their portfolio.
As such, with the help of our data provider, S&P Global Market Intelligence, I screened for the stocks that are selling at a trailing price-to-earnings ratio that is lower than that of the SPDR STI ETF (SGX: ES3). The SPDR STI ETF can be taken as a proxy for Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI). As of 3 August 2018, the SPDR STI ETF had a price-to-earnings (PE) ratio of 11.6.
Of the 30 Magic Formula stocks in Ser Jing’s list, 21 companies were trading at a PE ratio of below 11 (as of 3 August 2018). Of those 21 stocks, I picked out three companies which looked the most interesting to me.
Company 1: United Global Ltd (SGX: 43P)
United Global is an independent lubricant manufacturer that serves mainly the automotive, industrial, and marine industries. It manufactures a wide range of lubricant products under its in-house brands such as United Oil, U Star Lube, Bell1 and Hydropure.
United Global’s revenue had fallen from US$102.1 million in 2013 to US$99.8 million in 2017. However, its net profit nearly tripled from US$3.3 million to US$9.2 million during the same time frame.
As of 31 March 2018 (the date of the latest company data available), United Global’s balance sheet carried US$10.4 million in cash and bank balances, and US$7.2 million in total borrowings. This gives United Global a net cash position of US$3.1 million.
United Global’s acquisition of its strategic partner in Indonesia – PT Pacific Lubritama Indonesia (PLI) – in July 2017 should also bode well for its future. I touched on this topic in an earlier article of mine.
At United Global’s last traded price of S$0.45, the company was selling at 10.8 times trailing earnings.
Company 2: China Sunsine Chemical Holdings Ltd (SGX: CH8)
China Sunsine Chemical is a leading speciality rubber chemicals producer. It also ranks as the world’s largest producer of rubber accelerators, and China’s largest producer of insoluble sulphur. The company serves more than 65% of the top 75 tire makers in the world, including brands such as Bridgestone, Michelin, Goodyear, and Pirelli.
China Sunsine Chemical had grown its revenue by 12.7% per year from 2013 to 2017. But what’s more impressive is its annual net profit growth rate of 45.2% over the same period. This also means that the company’s net profit margin had improved from 4.5% in 2013 to 12.5% in 2017. To know more about the company’s financials, you can head here.
China Sunsine Chemical’s profit should show strong growth in 2018’s second quarter (2Q2018) compared to a year ago. At the end of July, the company announced a “positive profit alert” where it said:
“The expected profit growth is mainly due to the increase in both average selling price (“ASP”) and sales volume of the Group’s products. As disclosed in several of our prior results announcements, the Chinese government has been placing more emphasis on environmental protection, and more frequent environmental protection inspections were conducted. Some players in the rubber chemicals industry which failed to meet the relevant environmental regulations were forced to suspend their productions. This had resulted in the short supply in the market. As such, the Group was able to sell more products at a high ASP in 2Q2018.”
The balance sheet of China Sunsine Chemical, as of 31 March 2018, was clean with RMB 508.7 million in cash and bank balances, and zero debt. I will be keeping a lookout for the company’s earnings update when it is released today after market close.
On Monday, China Sunsine Chemical’s share price closed at S$1.44, giving the company a price-to-earnings ratio of 8.
Company 3: Tat Seng Packaging Group Ltd (SGX: T12)
Tat Seng designs and manufactures paper packaging products that are able to pack a diverse range of goods according to its customers’ specifications.
Just like China Sunsine, Tat Seng’s net profit has been growing at a faster rate than its revenue. In 2013, Tat Seng had revenue of S$215.6 million and net profit of S$11.8 million. These figures have grown to S$303.3 million and S$20.3 million, respectively, in 2017, translating into compound annual growth rates of 8.9% and 14.5%. It’s not a surprise to learn that Tat Seng’s net profit margin had improved over the same period, from 5.5% in 2013 to 6.7% in 2016.
Tat Seng could have pricing power for its China business. In 2017, Tat Seng Packaging’s China subsidiaries raised their selling prices, especially for sales of corrugated boards, and passed on higher raw material costs to their clients. Billionaire investor Warren Buffett likes companies that can raise prices without losing market share. He once said:
“The single-most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you’ve got a terrible business. I’ve been in both, and I know the difference.”
At one look, Tat Seng looks like it is selling commodity-type products. However, its ability to raise prices and grow its China business’s revenue grow by 35.9% in 2017 has made me more interested in learning more about the company.
At its last traded price of S$0.75, Tat Seng was selling at 5.8 times trailing earnings.
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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 Sudhan P doesn’t own shares in any companies mentioned.