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Is Oversea-Chinese Banking Corp Limited A Value Buy At S$11.10?

Yesterday, Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI), fell by 1.7%. One of the key culprits was Oversea-Chinese Banking Corp Limited (SGX: O39), which makes up around 13% of the index — OCBC’s share price tumbled by 1.6% on the day, closing at S$11.10.

The share price of S$11.10 is a whisker away from the 52-week intraday low of S$10.83 that was reached in mid-September 2017. This begs the question: Is OCBC a value buy at S$11.10? There isn’t a straightforward answer, but we can make some intelligent guesses from a few metrics.

Net asset value growth

The net asset value (NAV) is the difference between a company’s assets and its liabilities. It also shows the company’s net worth. By tracking a bank’s net worth over the years, we can see how much the bank’s capital has grown. Over the long-term, a bank’s share price tends to rise in line with its capital growth.

In 2013, OCBC’s NAV was S$6.99 per share. This figure has grown on a consistent basis yearly to reach S$8.96 in 2017. Thus, the bank’s net worth has increased at a rate of 6.4% annually.

Dividend growth

Shareholders like to be paid while holding onto a company’s shares. On that note, OCBC has been a steady dividend payer. Its dividends have climbed by 2.1% annually from S$0.34 per share in 2013 to S$0.37 per share in 2017.

The dividend growth is not something to shout about, but the bank’s payouts have been steadily rising. In OCBC’s 2017 annual report, its bank’s chairman and chief executive gave some insights into the dividend:

“Our approach to dividends is one where dividend payments are sustainable and predictable, and where we retain sufficient capital for long-term growth and new market opportunities.”

I like companies that balance the needs of their businesses with their shareholders’, without pandering to shareholder demands.

Valuation

The following table shows OCBC’s valuations from 2013 to 2017:Source: OCBC 2017 annual report

Over the past five years, the bank’s dividend yield has ranged from 3.40% to 4.19%, giving an average of 3.69%.

In terms of the price-to-earnings (PE) ratio (based on core earnings), it was between 10.35 and 13.18 from 2013 to 2017, with an average ratio of 11.07.

As for its price-to-book (PB) ratio, which is also known as the price-to-NAV ratio, it has fluctuated from 1.01 to 1.43, giving an average of 1.23.

At yesterday’s share price of S$11.10, OCBC had a dividend yield of 3.51%, a PE ratio of 10.29, and a PB ratio of 1.18. Except for the dividend yield, the bank’s PE and PB ratios are currently better than the average.

For more perspective, on 5 September 2018, the SPDR STI ETF (SGX: ES3) had a PE ratio of 10.93, PB ratio of 1.11 and a distribution yield of 3.54%. The SPDR STI ETF tracks the fundamentals of the Straits Times Index.

The Foolish bottom line

Given what I’ve gone through, it does not look like OCBC is overvalued at the current share price of S$11.10, given its lower-than-average PE and PB ratios. The bank has also shown stable growth in its net worth and dividends.

However, investors should also be mindful of escalating trade and political tensions happening around the globe now. If anything blows up, OCBC’s shares could fall even more. Having said that, investors who have a long-term view on the bank should be rewarded well.

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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.