Book values offer no support for stocks

Original Published October 28, 2008
BT

The plunge in investors' risk appetites has led to a massive sell-down in stocks and driven a number of counters below their book values.

And the worst-hit counters include those from the technology and property sectors.

For example, Venture Corporation, which once traded at a high of $14.80, lost more than two-thirds of its value to close at $4.42 on Friday, while its price-to-book value (P/B) plunged to a low of 0.67.

Another contract manufacturer Hi-P International last traded at a P/B of 0.64, while property developers such as Keppel Land and GuocoLand are now at price-book multiples of below one.

The P/B is a ratio of the current closing price to its latest quarter book value, a theoretical measure of what would be available to shareholders if the company goes bankrupt immediately.

Said UOB Kay Hian analyst Jonathan Koh: 'We have never seen stocks like Venture traded this low on both price-earnings and price-book ratios. And actually, we still find value in Venture and the dividend yield is pretty high too.

'But it seems like there is a big sell-down at firesale prices and some blue chips are not spared either.'

As for real estate plays, the main concern is that tighter credit and declining capital values in all sectors may force firms to write down their assets and make provisions for land acquired at high prices.

Said CIMB-GK economist Song Seng Wun: 'Although the improved credit market conditions now permit healthy companies and businesses to obtain their needed credit, investors are also shifting their attention to the real economy.

'These are nuts and bolts of the real world and there, the picture is becoming more negative by the day. Not only are you reading and hearing of more companies in trouble, but more countries are in trouble now - the latest being Argentina.'

According to Nouriel Roubini's Global EconoMonitor, Argentina's private pension assets are now in jeopardy due to the financial crisis, and the government may take over the management of US$28.7 billion of those funds that sharply declined in value.

The outlook for emerging markets is increasingly bleak, while the Singapore economy is now in a technical recession, with GDP growth here forecast to hit a low of 3 per cent this year.

Speaking to BT, Terence Wong of DMG & Partners said he is not surprised that stock prices have now been driven below book values. 'This is a typical trend in any recession. For example, the P/B for Straits Times Index averaged 0.74 during the Asian financial crisis, and only did slightly better at 1.1 when Sars hit Singapore. This time round, I believe STI could go below that even.'

On Friday, the STI fell 145.39 points to 1,600.28 - its lowest closing level since September 2003 - on fears of a global recession hurting corporate earnings, dealers said. The market was closed yesterday for the Deepavali holiday.

Indeed, a number of analysts believe that market conditions could get worse before they get better and urged investor caution for now.

Said Mr Song: 'While it is a great idea to buy when valuations are looking increasingly bombed-out, unless you have the deep pocket and can wait very patiently - like Mr Warren Buffett - you may prefer to wait until the dust has somewhat settled.'

Plus, the drop in inter-bank lending rates has not helped to allay investors' fears. For example, the VIX index - a measure of investor's risk aversion - hit a record high of 79.13 last Friday, in spite of the massive liquidity that has been pumped into the credit markets.

'Interestingly, crude oil peaked mid-July and has fallen some 55 per cent since. But over the same period the VIX has risen 155 per cent,' said Mr Song.

DMG, which is now reviewing its investment calls, recommends 'overweight' on high-yielding or defensive sectors such as transport and media.

Indeed, stocks such as SMRT Corp, ComfortDelGro and Singapore Press Holdings (SPH) appeared to have weathered the storm far better than their cyclical counterparts so far.

SMRT last traded at $1.63, while its P/B stood at 3.44. And media giant SPH closed at $3.31 on Friday, bringing its P/B to 2.5.
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