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If you are a shareholder in Manhattan Corporation Limited’s (ASX:MHC), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. MHC 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. 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.
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An interpretation of MHC’s beta
Manhattan’s beta of 0.52 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in MHC’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. Based on this beta value, MHC appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does MHC’s size and industry impact the expected beta?
With a market cap of AU$3.52M, MHC falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, MHC also operates in the oil and gas industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the oil and gas industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by MHC’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 MHC’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 MHC’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%, MHC 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 MHC 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 MHC’s actual beta value suggests, which is lower stock volatility relative to the market.