Warning: These LQ45 Giants Have Low Valuations
Jakarta, CNBC Indonesia — Turmoil surrounding MSCI since last Friday has sent hundreds of shares tumbling, pushing them well below their fundamental values.
The Jakarta Composite Index (IHSG) has fallen by more than 10% since MSCI raised the possibility of Indonesia being moved to standalone market status. So far this year, the IHSG has plunged by 40%.
However, a low share price does not necessarily mean a low valuation. Conversely, shares with high prices or large market capitalisations are not necessarily trading at expensive valuations.
Several LQ45-listed companies with market capitalisations of tens or even hundreds of trillions of rupiah still have relatively low valuations. Some have price-to-earnings ratios (PER) of around three times and price-to-book ratios (PBV) below one.
How to assess whether a share is cheap or expensive
A share’s valuation cannot be judged solely by its price per share. Investors can also use financial ratios, particularly PER and PBV, to compare a share price with a company’s fundamentals.
PER measures the share price against earnings per share. For example, a PER of five times means the share price is equivalent to five times the annual earnings per share used in the calculation. All else being equal, the lower the ratio, the less an investor pays for each rupiah of earnings.
PBV, meanwhile, compares the share price with the book value per share. A PBV below one means the market price is lower than the share’s accounting book value.
Dividend yield can also be considered. It shows dividends per share as a proportion of the share price, giving an indication of the dividend return at a particular price level.
LQ45 shares with low valuations
Valuation data show that several LQ45 shares have single-digit PERs and PBVs below one, although the companies’ market capitalisations vary considerably.
PT Astra International Tbk (ASII) has the largest market capitalisation on the list, at Rp180.15 trillion. Its shares trade at a PER of 6.05 times and a PBV of 0.78 times, with a dividend yield of 8.76%.
Next is PT Bank Negara Indonesia (Persero) Tbk (BBNI), with a market capitalisation of Rp117.49 trillion, a PER of 5.67 times and a PBV of 0.72 times. BBNI’s dividend yield is 11.08%.
PT Alamtri Resources Indonesia Tbk (ADRO) has a market capitalisation of Rp68.26 trillion, a PER of 6.96 times and a PBV of 0.83 times. Its dividend yield is 11.10%, the highest among the companies listed.
By PER, PT Bank Tabungan Negara (Persero) Tbk (BBTN) has the lowest ratio, at 3.06 times, followed by PT Indah Kiat Pulp & Paper Tbk (INKP) at 3.41 times.
INKP also has the lowest PBV on the list, at 0.30 times, followed by BBTN at 0.34 times. This means both shares trade below their book value per share.
In terms of dividends, ADRO and BBNI have the highest yields, at 11.10% and 11.08% respectively, followed by PT Perusahaan Gas Negara Tbk (PGAS) at 9.51%.
Low share valuations do not necessarily mean shares are undervalued
Even with low PER and PBV ratios, these shares are not necessarily trading below their fair value.
A low PER may indicate that a share is relatively cheap compared with earnings, but it may also reflect temporarily high profits or expectations of weaker future performance.
Similarly, a PBV below one does not always mean a share is undervalued. The market also takes into account a company’s ability to generate returns from its assets and capital.
The companies on the list operate in different sectors, so comparisons should take account of each company’s business characteristics, profitability, earnings outlook and risks.
PER and PBV are therefore best used as an initial guide to valuation, rather than as the sole basis for deciding whether a share is worth buying.