For those who need reminding, 2007 was a pretty topsy turvy year for the Singapore stock market. But it underscores our belief again in the virtues of value investing. While the Straits Times Index gyrated in a rocky thousand point range (see chart), some unloved stocks came to the fore and outperformed, proving that the buy-low, sell-high strategy may take time but does come good for some stocks.



LC Development.
The stock did very little in the first six months of 2007, but rocketed 150% between mid-June and mid-July – on no news! It announced the acquisition of a shell company in Hong Kong, Richful Properties, for HK$1. But that was all. In late April it was trading on a price-to-book ratio of 0.86x and was paying a dividend of about 2%. At a price-earnings multiple of 22.6x it wasn't exactly cheap, compared to the rest of the market. But thanks to the big rush into property developers, it rose to a P/E of 43.6x, a P/B of 1.5x and a yield of just 1.4%.


Meiban.
June and July were also the months things took off for Meiban. It appointed Yvette Lim as CFO on the 18th of that month. Credit Agricole bought 3.76 mln shares on July 11, giving it a deemed stake of 5.4%. And CEO Goh Tiong Yong bought 500,000 shares in the company. In late April, it was trading on a price-book ratio of 0.92x, a price-earnings of 11.3x and a yield of 3.3%. Fast forward to today, and it is up to a price-book of 1.8x, a price-earnings multiple of 10.7x (it's actually fallen) and a yield of 1.7%.

These two examples show that some value stocks, which bump around doing nothing for months, do take off when they are re-discovered.

As you would expect with value stocks, not all of them gained so strongly during 2007 and maintained those gains.

Kian Ann Engineering is a noteable example. When we first looked at it it was trading at S$0.28, with a price-book ratio of 0.85x and a price-earnings multiple of 9.9x. It was also paying a dividend of around 3%. By the end of the year, the stock had almost doubled – but given back most of those gains by year end. It is now trading at a P/E ratio of 8x and a yield of 4.2% but at 1.12x book value it is no longer classified a value stock.




Bottom line: value investing sometimes remains a waiting game. That is, waiting for underpriced companies to perform better, and waiting for the market to uncover hidden value. But given the alternative of hit-and-miss trading, value investing is a far less nerve-wracking experience. Good value is always recognised in the end.


Mark Laudi

Labels: Kian Ann Engineering, LC Development, Meiban, Value investing