If you are a shareholder in Kencana Agri Limited’s (SGX:BNE), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. There are two types of risks that affect the market value of a listed company such as BNE. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. The other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.
Different characteristics of a stock expose it to various levels of market risk. The most widely used metric to quantify a stock’s market risk is beta, and the market as a whole represents a beta of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.View our latest analysis for Kencana Agri
What is BNE’s market risk?
With a five-year beta of 0.58, Kencana Agri appears to be a less volatile company compared to the rest of the market. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. Based on this beta value, BNE appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could BNE’s size and industry cause it to be more volatile?
BNE, with its market capitalisation of S$61.71M, is a small-cap stock, which generally have higher beta than similar companies of larger size. However, BNE operates in the food industry, which has commonly demonstrated muted reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap BNE but a low beta for the food industry. This is an interesting conclusion, since its size suggests BNE should be more volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is BNE’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 BNE’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, BNE appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of BNE indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what BNE’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
BNE may be a worthwhile stock to hold onto in order to cushion the impact of a downturn. Depending on the composition of your portfolio, low-beta stocks such as BNE is valuable to lower your risk of market exposure, in particular, during times of economic decline. In order to fully understand whether BNE is a good investment for you, we also need to consider important company-specific fundamentals such as Kencana Agri’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is BNE’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has BNE 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 BNE’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.