For First Sponsor Group Limited’s (SGX:ADN) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. ADN is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and is measured by its beta. Different characteristics of a stock expose it to various levels of market risk, 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.
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What is ADN’s market risk?
First Sponsor Group’s beta of 0.22 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in ADN’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. ADN’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
Could ADN’s size and industry cause it to be more volatile?
ADN, with its market capitalisation of S$849.33M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, ADN also operates in the real estate industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap ADN but a low beta for the real estate industry. It seems as though there is an inconsistency in risks portrayed by ADN’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How ADN’s assets could affect its 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 ADN’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 account for less than a third of the company’s overall assets, ADN seems to have a smaller 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. Similarly, ADN’s beta value conveys the same message.