Just as people buy stocks irrationally when the stock market is rising, so do people sell stocks below their book values when market is falling fast.
A stock's book value represents the historical net worth of the company, which is computed as total assets minus all its payables and debt. It is the minimum amount that shareholders would theoretically receive if a company were to be liquidated.
Normally, a company that is listed at the stock exchange is expected to trade above its book value because investors pay premium over the earnings growth prospects of the company. The greater the growth potential of the company, the higher the premium the stock should have.
There are times when share prices of stocks fall below their book values. Some stocks fall below their book values because of perennial losses, lack of growth or low returns on investments, but there are stocks that are simply underrated.
These stocks trade below their tangible assets because of market ignorance, lack of trading volume or just bad market sentiment. While there are many stocks in the market that trade below their book values, not all are necessarily big bargains.
To search for potential value stocks, I screened over three hundred listed stocks based on the following criteria: Stocks must have minimum net profit of at least Php1.0 billion and have minimum of 10 percent return on equity.
Here are the top five, fundamentally undervalued stocks that offer great discounts to their historical net worth:
Shang Properties, Inc
Book Value: Php6.40
Discount: 51 percent
Shang Properties (PSE: SHNG) is in the business of residential development and leasing of upscale office and retail properties.
SHNG owns 71,101 square meters of property at the heart of Ortigas Center, a portion of which is leased to its wholly owned subsidiary, Shangri-La Plaza and affiliate, Edsa Shangri-La Hotel.
SHNG has also developed luxury residential condominiums such as the Shang Grand Tower, Shang Salcedo Place, The Rise condominium in Makati and St. Francis Shangri-La Place and One Shangri-La Place in Mandaluyong.
The company also recently opened the Shangri-La at the Fort in Bonifacio Global City, which features mixed use of hotel and luxury residential condominiums.
SHNG’s earnings have grown by an average of 15 percent per year from Php1.6 billion in 2012 to Php2.9 billion in 2016. Last year, the company reported that its 2017 earnings increased by 15 percent to Php3.3 billion.
SHNG has an average return on equity from 2012 to 2016 at 10.4 percent. Last year, its return on equity was 11.5 percent. The company also paid dividends consistently for the past 20 years. This year, it paid total cash dividend per share of Php0.1955, which is 18 percent higher than last year at Php0.165.
SHNG is not only trading at 51 percent discount to its book value of Php6.40, but also at high dividend yield of 6.3 percent.
Book Value: Php39.12
Discount: 46 percent
ABS-CBN (PSE: ABS) is the leading media and entertainment company in the country. The company develops local content and distributes mainly through free TV and radio with Channel 2 and DZMM as its flagship programs.
The company also produces film and music production through its subsidiary, ABS-CBN Film Productions Inc or more popularly known as Star Cinema. It also owns Sky Cable Corporation that offer cable services in both postpaid and prepaid packages.
About 51 percent of ABS’ revenues come from advertising while the balance of 49 percent from consumer sales. Revenues of ABS have been growing by an average of seven percent per year for the past five years from Php28.9 billion in 2012 to Php40.7 billion in 2017.
The growth in revenues generated an average earnings growth rate of 16 percent per year from Php1.6 billion in 2012 to Php3.3 billion last year. This year, however, ABS reported lower advertising placements for first half of the year, which caused its net income to fall by 41 percent from Php1.3 billion last year to Ph741 million on lower revenues and higher operating costs.
Earnings are expected to improve next year with higher advertising revenues from election campaign ads. ABS’ return on equity last year was 10.4 percent, slightly down from its average returns for the past five years of 10.6 percent.
ABS also pays regular dividends. Current dividend yield of the stock stands at 4.3 percent.
East West Banking Corporation
Book Value: Php17.33
Discount: 32 percent
East West Banking Corporation (PSE: EW) is one of fastest growing universal banks in the country that provide wide array of products and services focused on consumer and middle market segments.
EW is majority owned and controlled by Filinvest Development Corporation of the Gotaniun Family, one of the country’s leading conglomerates with diverse interests in real estate development, banking, sugar and power generation.
Net income of EW has been growing by an average of 23 percent per year for the last five years from Php1.8 billion in 2012 to Php5.1 billion in 2017 on the back of aggressive revenue growth.
This year, EW reported that its total net interest income for first half of the year grew by 7 percent to Php9.6 billion from Php8.9 billion last year. Its net income, however, fell by 11 percent to Php2.2 billion from Php2.5 billion due to lower income by its subsidiary, EW Rural Bank.
EW’s average return on equity from 2012 to 2016 was 10.4 percent. Last year, it generated higher return on equity of 13.75 percent.
Rockwell Land Corporation
Book Value: Php2.80
Discount: 31 percent
Rockwell Land Corporation (PSE: ROCK) is a premier property developer for residential and commercial projects that cater to the high-end and upper-mid markets mainly in Metro Manila.
ROCK is 86.6 percent owned and controlled by First Philippine Holdings of the Lopez Group. The company has completed several high-end residential projects in the past that include The Manansala, Joya Lofts and Towers, One Rockwell and The Grove by Rockwell to name a few.
ROCK also develops and leases commercial developments with total portfolio of 219,700 sqm of leasable spaces. Among its biggest properties include the Power Plant Mall and Santolan Town Plaza.
Net income of ROCK has been growing by an average of 13 percent per year from Php1.1 billion in 2012 to Php2.1 billion in 2017 on the back of 16 percent annual growth in revenues.
This year, ROCK reported that its revenues for first six months of the year grew by 18 percent from Php5.8 billion last year to Php6.9 billion. This resulted to a 20-percent increase in net income to Php1.2 billion.
Since the company was officially listed in 2012, its return on equity has been averaging at double-digit figures. Last year, ROCK generated return on equity of 12.9 percent, higher than 12.5 percent the previous year.
Book Value: Php9.99
Discount: 17 percent
Petron Corporation (PSE: PCOR) is the largest oil refining and marketing company in the Philippines that supplies nearly 40 percent of the country’s oil requirements.
PCOR is majority owned and controlled by San Miguel Corporation with an aggregate ownership of 68.2 percent. The company has the largest retail network with nearly 2,400 service stations with an extensive line of products, including LPG brands and Gasul.
PCOR’s revenues have been quite volatile in the past five years. Its revenues fell to Php360 billion in 2015 from Php482 billion the previous year, but started to regain from there on.
Last year, the company reported 26-percent growth in revenues to Php434 billion, while its net income increased by 26 percent also to Php12.7 billion.
This year, PCOR’s first six month revenues grew by 32 percent from Php207 billion last year to Php273 billion, which increased its net income by 17.5 percent to Php8.9 billion.
PCOR’s return on equity has been steadily improving in the last five years. It started at 2.9 percent in 2012 that grew to 12.1 percent in 2016. Last year, its return on equity increased to 14.3 percent.
Henry Ong, RFP, is president of Business Sense Financial Advisors. Email Henry for business advice email@example.com or follow him on Twitter @henryong888