Should You Have Lafe Corporation Limited’s (SGX:AYB) In Your Portfolio?

If you are looking to invest in Lafe Corporation Limited’s (SGX:AYB), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. There are two types of risks that affect the market value of a listed company such as AYB. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce 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. A widely-used metric to measure a stock’s market risk is beta, and the broad market index represents a beta value of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.

See our latest analysis for Lafe

What is AYB’s market risk?

With a five-year beta of 0.68, Lafe 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, AYB appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

SGX:AYB Income Statement Feb 3rd 18
SGX:AYB Income Statement Feb 3rd 18

Does AYB’s size and industry impact the expected beta?

With a market cap of SGD17.73M, AYB falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Furthermore, the company operates in the real estate industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap AYB but a low beta for the real estate industry. It seems as though there is an inconsistency in risks portrayed by AYB’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

Is AYB’s cost structure indicative of a high beta?

During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I test AYB’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets is virtually non-existent in AYB’s operations, it has low dependency on fixed costs to generate revenue. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. This is consistent with is current beta value which also indicates low volatility.

What this means for you:

You could benefit from lower risk during times of economic decline by holding onto AYB. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. In order to fully understand whether AYB is a good investment for you, we also need to consider important company-specific fundamentals such as Lafe’s financial health and performance track record. I urge you to complete your research by taking a look at the following:

  • 1. Financial Health: Is AYB’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.
  • 2. Past Track Record: Has AYB 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 AYB’s historicals for more clarity.
  • 3. 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.