Thanks to a correction that began in February last year, the stock market now offers plenty of attractively-priced stocks. It is, therefore, a great time for bargain hunters to start accumulating shares of hammered down companies.
With that in mind, here is a quick look at two stocks in Singapore that I believe are in bargain territory.
Oversea-Chinese Banking Corp Limited (SGX: O39)
Singapore-based OCBC was formed in 1932 through the merger of three local banks. Since then, the company has grown to become one of the biggest local banks, with operations in 18 countries and regions.
In the past decade, OCBC’s business has grown from strength to strength. Its total income reached S$9.64 billion in 2017, compared to S$3.84 billion in 2006. During that time, its book value per share has more than doubled from S$4.07 to S$8.96. The fact that this period includes the great financial crisis of 2008, a period when many financial institutions struggled, making OCBC’s tremendous growth more impressive.
I believe there are also many good reasons to think that OCBC can continue to thrive in the future.
First, while most other companies are negatively affected by rising interest rates, financial institutions can benefit from higher rates. Higher rates lead to higher interest income from loans, widening of net interest margin, and ultimately increasing profitability from the banks’ loan business. With the Fed expected to raise rates at least twice this year, banks in Singapore are expected to do well.
Singapore is also positioned as a financial hub in Southeast Asia. Southeast Asia is expected to be one of the fastest growing regions in the world. With OCBC’s presence in Singapore and Indonesia, OCBC can ride on the coattails of the region’s economic expansion.
And finally, valuation-wise, OCBC looks like a steal. It currently trades at S$11.35 per share, more than 20% off its peak. Its shares sport a price-to-book ratio of 1.1 and a price-to-earnings multiple of 10.0, with an attractive dividend yield of 3.4%.
AEM Holdings Ltd (SGX: AWX)
AEM supplies test handler systems for the production of semiconductors. In 2015, the company co-developed a new test handler system that had faster throughput and lowered the cost of testing by around 50 to 80%, giving AEM a technological edge over its rivals. Consequently, sales and profits surged in the next few years.
However, in 2018, while sales and profit continued to grow, management said that the upgrading cycle for the new test handler systems at its major client was close to complete and that sales would be more volatile going forward.
This led to some analysts cutting their price targets, causing AEM’s share price to plummet more than 50% from its peak.
But in my view, the sell-down looks to be overdone. Despite the upgrading cycle of its test handler systems to its major client completed, AEM continues to sell field services and consumables, which are the sustainable and recurring elements of its business. Around 56% of its revenue came from its recurring sales in 2017. AEM has also said that this segment of its business will grow as more test handler systems are sold.
In mid-2018, the company also announced that it was chosen by Huawei to deliver a test solution to test 100 Gbps links for Huawei’s short reach 5G backhaul network this year. The new project would diversify AEM’s business and add an additional income stream to its existing test handler business.
While there are certainly risks related to AEM Holdings such as its concentrated clientele and product concentration, it does have a recurring element to its business that contributes significantly to its top line, continuing to sustain its business going forward. Moreover, at its current price, AEM shares looks to be in bargain territory.
At S$0.86 per share, AEM has a trailing price-to-earnings of a measly 5.7 and an attractive trailing dividend yield of 3.7%.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has a recommendation on AEM Holdings Ltd and Oversea-Chinese Banking Corp Limited . Motley Fool Singapore contributor Jeremy Chia owns shares in AEM Holdings Ltd.