updated 21 Jan 22
To new investors, trying to even find them from among the 700+ stocks listed in the Singapore Exchange can prove to be a nightmare.
Deciding which companies are undervalued can be a massive headache.
To add on to the trouble, there are a dozen approaches, a dozen experts, and a dozen ways to “calculate” if a stock is indeed undervalued.
Too often, this information overload paralyses new investors.
“But X said this! And Z said that! But my friends told me A! And my uncle told me B! Alamak! How!?”
Me in 2007, trying to make sense of the stock markets.
Today’s article is going to cut through some of that fluff.
How?
We use proven, tested, mathematical numbers, that are easy to make sense of, in order to look at only companies worth our time and money to invest in.
This provides you with a clear, understandable, research-backed method, to grow your money.
Not hocus pocus. “look at the line! confirm go up! my Shifu say one!”
Not subjective “oh i think it has a moat”.
We use numbers and ratios that have been tested and proven (look at the evidence later) to generate higher than average returns for investors over long periods of time – so you can do the same and cut out the unnecessary.
I cannot recommend enough that you use proven strategies (of which there are few, and if you choose one, stick to it) to help you invest versus relying on “instinct”, and “feelings”.
Those have never served an investor well.
How to find undervalued stocks listed on the Singapore Exchange
Let’s talk about our chosen criteria today. We use the Piotroski F-score, the Altmann Z score, and a simple Price to Book Ratio. (you can read how we incorporate the F score into our CNAV strategy here)
#1 Criteria: Piotroski F-score (Checks Financial Strength of the Company)
How you use it:
9 point score. Companies with 8 or 9 points are strong. Companies with 0-2 points are considered weak.
Evidence:
Joseph Piotroski, who created the test, found that over a 12 year period from 2003-2015, a portfolio of stocks with high F-score (8 or 9 points) earned an average of 18.3% annually. These results were obtained by way of backtesting. You can read the details here.
#2 Criteria: Altmann Z Score (Likelihood of a Company to Go Bankrupt)
How you use it:
You should aim for companies with scores of 3 and ABOVE. Scores of 1.8 and BELOW indicate a company is highly like to go bankrupt. Scores of 3 and above indicate it is unlikely to go bankrupt.
Evidence:
In its initial test, the Altman Z-Score was found to be 72% accurate in predicting bankruptcy two years before the event, with a Type II error (false negatives) of 6% (Altman, 1968).
In a series of subsequent tests covering three periods over the next 31 years (up until 1999), the model was found to be approximately 80%–90% accurate in predicting bankruptcy one year before the event, with a Type II error (classifying the firm as bankrupt when it does not go bankrupt) of approximately 15%–20% (Altman, 2000).
#3 Criteria: Price to Book Ratio
Price to book ratio is as simple as it sounds. What it measures is the company’s share price (what the market deems it to be worth currently) versus its Book value (what the company actually has in terms of value, like cash, lands and buildings, etc.).
A price to book ratio of 1 indicates that the company is evenly priced.
A price to book ratio of less than 1 means that the company is undervalued compared to what it possesses. This might be because the company is in financial distress or because it may be facing severe negative conditions ahead, or maybe it is related to something else.
The possibilities are limitless.
Why I Combined These Three Criteria Together For You
As addressed above, the possibilities for a company to be undervalued are wide and varied.
To reduce the number of scenarios in which we get screwed over and lose our money, it was necessary for us to check which ratios in combination would work best.
A screener does this for us cleanly, and efficiently.
What is a screener?
The simple answer is that it is a filter.
When you use a stock screener, it applies a filter to all available stocks (you can choose which market, Singapore, Hong Kong, USA, etc) and lets you SEE ONLY THE COMPANIES THAT PASSED THE CRITERIA YOU HAVE SET.
For example, using the criteria I set out above, only companies which possess great financial strength (Piotroski F-Score), are unlikely to go bankrupt (Altmann Z Score), and are undervalued (Price to Book Ratio), are presented.
It’s like sifting gold from sand.
We want to be doing the same thing. We want to look for companies that are gold among the sand.
Doing this also drastically reduces the amount of time you have to spend.
Instead of having to analyse 700 companies, all of a sudden, you only have to look at 10-15 at best!
In fact, using these ratios, I only generated 10 companies to look at.
And I picked the 5 companies which were the most undervalued (and thereby represented the most potential gains for the investor).
Useful isn’t it?
Let’s take a look at these 5 companies.
Note: All potential profit is calculated by way of subtracting current share price from fair value share price (net asset valuation).
Also note, that the S&P Index which Warren Buffet has advised his will to invest in after his passing, has an average return of 10% thus far.
These are the benchmarks we have to beat. Otherwise, its simply better to invest in the S&P index, and stop wasting our time.
Please note. All companies listed here have an Altmann Z Score of 3 and above and a Piotroski F-Score of 9. They are all also undervalued going by Price to Book Ratio. That was our screening criteria.
#1 – Sinarmas Land Limited
Sector: Real Estate
Industry: Real Estate Management & Development
Code: SGX:A26
| Share Price | SGD0.24 |
| Net Asset Valuation | |
| Price to Book Ratio | 0.368 |
| Altmann Z-Score | 7.9 |
| Piotroski F-Score | 9 |
Sinarmas Land Ltd. is a property investment holding company, which engages in the development of commercial real estates.
It owns properties across Indonesia, United Kingdom and many other countries.
#2 – PNE Industries (23% Potential Profit, 7.6% Dividend Yield)
Sector: Producer Manufacturing
Industry: Electrical Products
Code: SGX:BDA
| Share Price | SGD0.785 |
| Net Asset Valuation | SGD0.963 |
| Price to Book Ratio | 0.815 |
| Altmann Z-Score | 3.623 |
| Piotroski F-Score | 8 |
PNE Industries Ltd. is an investment holding company, which engages in design, manufacture, and sale of electronic products.
It operates through two segments:
- Contract Manufacturing
- Trading.
The Contract Manufacturing segment develops electronic controllers and transformers.
The Trading segment produces and sells emergency lighting equipment and printing materials.
PNE Industries was founded on September 25, 1999 and is headquartered in Singapore.
#3 – Brook Compton (23% Potential Profit, 2.7% Dividend Yield)
Sector: Distribution Services
Industry: Wholesale Distributors
Code: SGX:AWC
| Share Price | SGD0.73 |
| Net Asset Valuation | SGD0.886 |
| Price to Book Ratio | 0.824 |
| Altmann Z-Score | 3.612 |
| Piotroski F-Score | 8 |
Brook Crompton Holdings Ltd. engages in the distribution of electric motors. It also offers management services.
It operates through the following segments: Asia Pacific, United Kingdom, North America, and Corporate.
The company was founded on December 11, 1947 and is headquartered in Singapore.
#4 – KOYO INTERNATIONAL LIMITED (Potential Profit, 46%, Dividends 1.5%)
Sector: Technology Services
Industry: Internet Software/Services
Code: SGX:5OC
| Share Price | SGD0.067 |
| Net Asset Valuation | SGD0.098 |
| Price to Book Ratio | 0.65 |
| Altmann Z-Score | 3.054 |
| Piotroski F-Score | 8 |
Koyo International Ltd. is an investment holding company, which engages in the provision of mechanical and electrical engineering services.
It operates through the following segments:
- Mechanical Engineering
- Electrical Engineering
- Facilities Management.
The Mechanical Engineering segment involves in designing and installing air-conditioning and mechanical ventilation, plumbing and sanitary installation, fire prevention and protection system, and integrated systems.
The Electrical Engineering focuses on planning and putting high and low tension electrical distribution systems and communications, audio-visual, and securities systems.
Facilities Management gives maintenance, repair, and replacement services for commercial buildings, hotels, schools, and universities.
The company was founded by Chek Heng Foo on January 4, 2001 and is headquartered in Singapore.
#5 – LHT (Potential Profit 74%, Dividend Yield 5.4%)
Sector: Process Industries
Industry: Containers/Packaging
Stock Code: SGX:BEI
| Share Price | SGD0.56 |
| Net Asset Valuation | SGD0.97 |
| Price to Book Ratio | 0.584 |
| Altmann Z-Score | 3.617 |
| Piotroski F-Score | 8 |
LHT Holdings Ltd. engages in the manufacture and distribution of wooden pallets and timber-related products.
It operates through the following business segments:
- Pallet and Packaging
- Timber Related Products
- Technical Wood and Related Products
- Pallet Rental and Other Services.
The Pallet and Packaging segment manufactures and supplies wooden pallets and cases for the packing of industrial products.
The Timber Related Products segment involves the trading of raw timber related products.
The Technical Wood and Related Products segment produce technical wood, technical wood flooring, and wood waste collection. The Pallet Rental and Other Services segment handle the pallet-leasing business.
The company was founded by Neo Koon Boo and Tan Kim Sing in 1977 and is headquartered in Singapore.
Closing Thoughts
You may have noticed that I did not do a necessarily deep dive on the companies mentioned.
This is because further analysis of the companies that are done will have to fall into the category of subjective evaluation.
Two different people can come together, look at the same stock, and arrive at different conclusions.
I have aimed today to remove such personal views from the situation by looking only at the numbers of the company, which while debatable, is infinitely less so than that of a subjective view.
In doing so, I hope to have given you the sort of crystal clear clarity that is so often lacking in the stock markets and those new to it.
I hope you have benefited well from reading this.
If so, I would ask that you share it so that your fellow friends and possible/potential investors can invest better.
Kind regards,
Irving
PS: If you wish to accelerate your learning on how to identify businesses(stocks) to invest in, you can sign up for a free introductory workshop here.
Wonderful article. Thank you for your input.