AFTER last week's article which listed some 30 companies with high return on equity and low price-to-book ratio, a friend suggested that I should go through some of the companies in the list and see if there are indeed reasons for them to be trading at a low valuation relative to their earnings. And I thought it was a good idea.
Indeed, some investors have gone through the list themselves and are happy to see their stocks on the list. One looked at the numbers for a couple of companies, and understood why they are trading at their current levels.
And a few of the stocks in the list actually saw a sharp spike in their share price.
Jardine Strategic
Jardine Strategic appeared first on the list. According to the Bloomberg data, its price-to-book (PTB) is only 0.4 while its return on equity (ROE) is 20.9 per cent. However, based on the group's latest financial numbers, its shareholders' funds stand at US$7.6 billion. The market capitalisation for the group as of yesterday was US$14.7 billion. So the PTB is actually higher - at 1.9 times.
The ROE/PTB hence works out to a ratio of 10.8. This will put the group lower down the list. But it is among the highest, compared with other blue-chip companies outside of the Jardine stable.
And one astute investor commented that if one wants exposure to Asia's economy, Jardine Strategic or Jardine Matheson would be one of the best ways to get it.
One astute investor commented that if one wants exposure to Asia's economy, Jardine Strategic or Jardine Matheson would be one of the best ways to get it.
Jardine Strategic is a holding company with interests in property development and investments via Hongkong Land, pan-Asian retail operations via Dairy Farm, a top-end hotel chain under Mandarin Oriental, various financial services under unlisted Rothschilds Continuation, and motor trading via Jardine C&C. It also has a 53 per cent stake in Jardine Matheson, which in turn owns Jardine Pacific, Jardine Motors and Jardine Lloyd Thomson.
Jardine Pacific holds interests in non-listed Asian businesses, principally in transport services, engineering and construction, restaurant and IT services.
Jardine Motors is in motor vehicle transportation and sales in Greater China and has a growing presence in mainland China. Jardine Lloyd Thomson is a listed insurance broker and risk management adviser.
In its latest annual report, Jardine Strategic's chairman Henry Keswick said that the outlook is promising for most of the markets in which the group's businesses operate. It may, however, be demanding to match in 2007 the level of growth that has been seen in recent years, he added.
'Looking further ahead, Hongkong Land will recognise profits upon completion of residential properties already sold, and most of the group's other businesses should perform well as they grow their operations,' he said.
Noel Gifts
The second company on the list was Noel Gifts. According to Bloomberg's list, its ROE last year was a whopping 60 per cent. However, the bulk of the net profit was from the sale of its corporate building for a net gain of $9.8 million. Excluding that, net profit for the last financial year was $1.4 million. That's a growth of 126 per cent from the year before.
ROE, however, is not spectacular, at less than 10 per cent. Noel is trading at about 1.6 times its book value.
All in all, it's not exactly a screaming buy. Going forward, however, the management seems bullish. It said that with a better economy and positive outlook for the property market, the rental income from the remaining properties will continue to be buoyant for the property division.
It added that riding on the strong economy, the gifts division will be investing more into advertising and promotion to achieve higher long-term market share.
The market seems to have noticed the improving prospects for Noel as its share price has risen by 45 per cent in the last two months.
Hengxin
China-based telecommunications cable maker Hengxin was one of the high-flyers soon after it got listed in Singapore. However, in the last six months it has seen its chief executive officer and chief financial officer resign, along with some of its directors. Meanwhile, some of its substantial shareholders have also been cutting their stakes in the company.
The group's first-quarter results saw it growing its top line by 40 per cent. However, net profit was down by 21 per cent as distribution, selling and administrative expenses escalated. As a result, its ROE will be significantly less than last year's figure. Its price-to-book ratio now stands at about 1.5 times.
A quick glance at Hengxin's latest balance sheet shows that it has a big sum of accounts receivables. Its trade receivables turnover days was 243 days for the period ended March 31, 2007.
The management said that although Hengxin operates in a competitive environment, it 'remained optimistic about the demands for the group's products'. It expects export sales to India and other developing countries to increase. Managers added that Hengxin may increase production capacity to meet the growing demand.
But taken as a whole, there appears to be a number of risk factors when it comes to investing in the company. This explains the continued weakness of its share price.
The movers
Meanwhile, the stocks in the list which saw significant jumps in their share price this week include Adroit, Broadway, Valuetronics, Contel and New Wave. Valuetronics benefited from a 'buy' report from Kim Eng, which sets a target of 49 cents. The stock last closed at 36 cents.
But as can be seen from the above, such screening provides a short list for one. Not all are good buys. More detailed analysis is still required.
The writer is a CFA charterholder. She can be reached at hooiling@sph.com.sg.
