If you are looking to invest in Hiap Seng Engineering Ltd’s (SGX:510), 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. The beta measures 510’s exposure to the wider market risk, which reflects changes in economic and political factors. Different characteristics of a stock expose it to various levels of market risk, and the broad market index represents a beta value 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.
See our latest analysis for Hiap Seng Engineering
What does 510’s beta value mean?
Hiap Seng Engineering’s beta of 0.04 indicates that the stock value will be less variable compared to the whole stock 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. 510’s beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.
Could 510’s size and industry cause it to be more volatile?
510, with its market capitalisation of S$36.75M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, 510’s industry, energy services, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap 510 but a low beta for the energy services industry. It seems as though there is an inconsistency in risks portrayed by 510’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.
Can 510’s asset-composition point to a higher 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 examine 510’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since 510’s fixed assets are only 24.89% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect 510 to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. This is consistent with is current beta value which also indicates low volatility.