I like buying undervalued shares of companies. As such, a lot of my time is spent searching for such opportunities. One of my personal techniques to do so is to look for shares that are trading below book value – i.e., they have a price-to-book (PB) ratio of below 1. In this article, I want to discuss two such blue chip shares.
(If you’re wondering what terms such as PB ratio, book value, and blue chips mean, fret not – I’ll be explaining them shortly!)
For some investors, finding shares with low PB ratios is futile, since many of such companies are cheap for good reasons – their PB ratios may look cheap, but they are not undervalued! Still, a low PB ratio is a useful way to find ideas, especially if it’s blue chip companies that carry such valuations.
Definitions and explanations
The book value of a company can be found from its balance sheet. It is calculated by finding the difference between a company’s total assets (what it owns) and total liabilities (what it owes). In essence, the book value – which is also known as equity or net asset value – is the net worth of a company; it is what shareholders could theoretically receive if the company was liquidated.
The PB ratio is calculated by dividing a company’s share price by its book value per share.
As for the term blue chip, it typically refers to companies with long operating histories and large, stable businesses. In Singapore’s context, blue chips refer to the 30 components that make up the local stock market barometer, the Straits Times Index (SGX: ^STI).
The first cheap blue chip
The first blue chip I want to discuss is Sembcorp Industries Limited (SGX: U96), a bona-fide conglomerate with four major business segments: Utilities; Marine; Urban Development; and Others. The Marine segment’s contribution comes mainly from Sembcorp Industries’ roughly 61% ownership stake in Sembcorp Marine Ltd (SGX: S51).
At S$2.51 currently, Sembcorp Industries’ share price has declined by 30% from its 2018-peak of S$3.57 in February. Right now, crude oil is trading at about US$46 per barrel (based on the price of WTI crude), down significantly from a 2018-peak of nearly US$80 reached in October. As Sembcorp Industries has big exposure to the oil and gas industry through its subsidiary Sembcorp Marine – the Marine segment accounted for 44% of Sembcorp Industries’ revenue in the first nine months of 2018 – the low oil price may have caused negative sentiment among investors.
It does not help too that Sembcorp Industries’ recent results have not been good. In the third quarter of 2018, the conglomerate’s profit attributable to shareholders fell by 12% (to S$82 million) despite a 36% jump in revenue (to S$3.0 billion) ; there was a similar dynamic for the first nine months of 2018, when profit attributable to shareholders was down by 9% (to S$241 million) even though revenue was up 38% (to S$9.1 billion).
Sembcorp Industries’ share price of S$2.51 gives it a PB ratio of just 0.66.
The next cheap blue chip
Next up I have Hongkong Land Holdings Limited (SGX: H78). The company’s main business is the ownership of commercial properties in Hong Kong and Singapore. It has investment properties in other parts of Asia, and is also active in developing high-end residential properties in China, Singapore and elsewhere.
Hongkong Land’s share price is at S$6.40 currently, which gives the company a PB ratio of merely 0.40. The company, in a similar manner to Sembcorp Industries, has also seen its share price fall substantially in 2018 – the share price peaked at US$7.40 in June this year. Investors may have lost some confidence in the company because of the ongoing squabble over trade issues between China and the US; the lion’s share of Hongkong Land’s investment properties portfolio resides in Hong Kong, and the economy of the Special Administrative Region could be negatively impacted if China’s economy were to suffer as a result of the Sino-US trade war.
But, investors can derive some comfort from the company’s business performance. In the first half of 2018, Hongkong Land’s book value per share increased by 2% year-on-year to US$15.93. In an interim management statement for 2018’s third quarter, Hongkong Land also said that its properties in Hong Kong continued to experience positive rental reversions as a result of tight market supply.
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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 recommendation for Hongkong Land Holdings.