Yahoo Finance Should You Have Sembcorp Marine Ltd’s (SGX:S51) In Your Portfolio?
If you are a shareholder in Sembcorp Marine Ltd’s (SGX:S51), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures S51’s exposure to the wider market risk, which reflects changes in economic and political factors. Not every stock is exposed to the same level of market risk, and the broad market index represents a beta value of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
View our latest analysis for Sembcorp Marine
An interpretation of S51’s beta
Sembcorp Marine has a beta of 1.04, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. Based on this beta value, S51 will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
Does S51’s size and industry impact the expected beta?
With a market capitalisation of S$4.30B, S51 is considered an established entity, which has generally experienced less relative risk in comparison to smaller sized companies. However, S51 operates in the machinery industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors can expect a low beta associated with the size of S51, but a higher beta given the nature of the industry it operates in. This is an interesting conclusion, since its size suggests S51 should be less volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is S51’s cost structure indicative of a high beta?
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I test S51’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given a fixed to total assets ratio of over 30%, S51 seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. As a result, this aspect of S51 indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This is consistent with is current beta value which also indicates high volatility.
What this means for you:
You could benefit from higher returns from S51 during times of economic growth. Its higher fixed cost isn’t a major concern given margins are covered with high consumer demand. Though, in times of a downturn, it may be safe to look at a more defensive stock which can cushion the impact of lower demand. In order to fully understand whether S51 is a good investment for you, we also need to consider important company-specific fundamentals such as Sembcorp Marine’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for S51’s future growth? Take a look at our free research report of analyst consensus for S51’s outlook.
Past Track Record: Has S51 been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of S51’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
