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SI Research: Three Companies With The Lowest P/E
In the hunt for investment worthy stocks, investors tend to make use of several common valuation indicators such as price-to-earnings (P/E) ratio, price-to-book value (P/B) ratio and dividend yield. Refer to pages 36-37 for Lowest P/E to get a clearer picture.
Naturally, each of these indicators should not be used individually as a clearer picture will only be shown after delving deeper.
To illustrate the process, we take a look at the three companies with the lowest P/E and find out if they are indeed undervalued.
HL Global Enterprises
The gain on the disposals boosted the group’s net profit for FY17 to $86.2 million, turning it around from a net loss of $0.2 million in FY16. HLGE’s shares are currently valued at a trailing 12 months (TTM) P/E of 0.5 times, implying that investor confidence in the company is abysmally low and they are only willing to pay $0.50 per dollar of earnings.
Taking a look at HLGE’s financial position, it is notable that group holds a substantial amount of cash at $59.9 million. Against total liabilities of $13.7 million, the group sits in a net cash position of $46.3 million or $0.493 per share. Meanwhile, at the time of writing, the group’s shares are only changing hands at $0.42. To top it off, HLGE’s shares have an attractive dividend yield of 7.1 percent and are also trading at a 50 percent discount to book value.
At this point, many would be tempted to jump on the bandwagon, not realising that it could very well be a value trap.
In this case, the low P/E should not be taken into account as the group would have remained in the red if not for the one-off gains on disposal. In terms of business operations, HLGE’s outlook is indeed rather bleak. The group’s remaining hospitality operation, CHCH, saw its occupancy rate fall four percentage points to 67 percent in 2017 as a result of the increased supply of hotel rooms and services apartments in its vicinity.
Appearing to be attractive, the group’s dividend of $0.03 per share for FY17 was its first ever payout. Without a solid payout record, it would be overly optimistic to expect the same level of dividends for FY18.
Finally, HLGE’s net cash per share of $0.493 could translate into a potential gain of 17.3 percent, should one be able to acquire the entire company at the current price of $0.42 per share. However, that scenario is hypothetical and the best bet here for its shareholders would be to hope for an interested party to launch a takeover bid.
Vibrant Group
Trading at a TTM P/E of 1.9 times last month, the valuation of Vibrant Group’s (Vibrant) shares have now come down to 1.1 times after a sharp fall in its share price on 18 July 2018.
For Vibrant’s case, the low valuation is a result of an acquisition that has possibly gone wrong.
Trouble for the group began brewing about a year ago when it acquired ASX-listed Blackgold International Holdings (BIH) for $40 million. The acquisition, which provided the group with an opportunity to expand into the commodity logistics and trading business, also resulted in a significant one-off gain on bargain purchase of $123.9 million.
In June 2018, the group applied for an extension of time for the release of its financial statements for FY18 as the audit for BIH has not been concluded. Subsequently, it was announced on 18 July 2018 that the auditors have identified certain irregularities and discrepancies in respect of coal mining and coal trading receipts and sales invoices of BIH.
Should a reversal of all revenues arising from BIH’s coal mining and coal trading business be required, Vibrant’s 9M18 net profit would decrease by 98.7 percent to $1.6 million, driving the group’s TTM P/E up to over 20 times. Prior to any further announcements, we believe that the group’s valuations are indeed reasonable due to the uncertainties surrounding BIH.
Thakral Corporation
Listed on the SGX Mainboard since December 1995, Thakral Corporation’s (Thakral) Lifestyle Division supports foreign beauty, wellness and lifestyle brands in key markets in Asia, in particular China, Southeast Asia and India. Meanwhile, the group’s Investment Division engages in real estate and other opportunities including property-backed financial instruments, with a main focus on Australia and Japan.
Based on its current share price of $0.475, Thakral is valued at a TTM P/E of 1.6 times, P/B of 0.5 times and dividend yield at 4.2 percent.
As appealing as it may seem the low TTM P/E was due to a gain on the sale of warehouse properties in Hong Kong last year. Excluding the one-off gains, Thakral’s TTM P/E would be as attractive at around 13.6 times. That said, the group’s dividend yield is rather decent and taking into consideration the consistent payout over the past three years, it is likely that Thakral would aim to maintain the same level of dividend payout in the future.
Key Takeaways
The three companies above show that there is more often than not an underlying reason for a certain share price movement. A company with attractive valuations could be due to many reasons including but not limited to auditing issues, one-off gains and weak business outlook.
It is always important to take a deeper look before committing to an investment decision, lest what is thought to be a bargain purchase could turn out to be a costly mistake.
