Fragrance Group Limited (SGX:F31), a SGD$1.07B small-cap, operates in the real estate industry which displays attractive investment characteristics relative to other sectors, especially over time. Real estate analysts are forecasting for the entire industry, negative growth in the upcoming year , and an overall negative growth rate in the next couple of years. Unsuprisingly, this is below the growth rate of the Singapore stock market as a whole. Today, I will analyse the industry outlook, and also determine whether Fragrance Group is a laggard or leader relative to its real estate sector peers. See our latest analysis for Fragrance Group
What’s the catalyst for Fragrance Group’s sector growth?
Over the past couple of years, as yields for high quality real estate investments have become under pressure, investors have swung towards more niche and diversified buildings such as medical offices, student housing and data storage facilities. In the previous year, the industry saw growth in the teens, beating the Singapore market growth of 8.07%. Fragrance Group lags the pack with its negative growth rate of -57.64% over the past year, which indicates the company will be growing at a slower pace than its real estate peers. As the company trails the rest of the industry in terms of growth, Fragrance Group may also be a cheaper stock relative to its peers.
Is Fragrance Group and the sector relatively cheap?
The real estate industry is trading at a PE ratio of 12x, in-line with the Singapore stock market PE of 15x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. Furthermore, the industry returned a similar 7.31% on equities compared to the market’s 7.99%. On the stock-level, Fragrance Group is trading at a higher PE ratio of 121x, making it more expensive than the average real estate stock. In terms of returns, Fragrance Group generated 0.0077% in the past year, which is 7% below the real estate sector.
What this means for you:
Are you a shareholder? Fragrance Group has been a real estate industry laggard in the past year. In addition to this, the stock is trading at a PE above its peers, meaning it is more expensive on a relative earnings basis. This may indicate it is the right time to sell out of the stock, if your initial investment thesis is around the growth prospects of Fragrance Group, since there are other real estate companies that have delivered higher growth, and are possibly trading at a cheaper price as well.
Are you a potential investor? If Fragrance Group has been on your watchlist for a while, now may be the best time to enter into the stock. Its lagging growth rate compared to its real estate peers in the near term doesn’t build up its investment thesis, and in addition to this, it is also trading at a PE above these companies. If growth and mispricing are important aspects for your investment thesis, there may be better investments in the real estate sector.