This Week’s Falling Knife: United Fibre System

stockmarketdownShares in United Fibre System (SGX: P30) were down by as much as 11% at some moment in time this week. However, in terms of dollars and cents (actually, just fractions of a cent), the shares fell $0.002 from $0.018 to $0.016.

Normally, at this point I would give a brief description of what the company does. However, this time I am left scratching my head to provide a coherent synopsis. The company describes itself as a major player in the international pulp industry. It grows trees that it shreds into wood chips and pulp.

But it also operates a construction arm, Poh Lian Construction, which has been experiencing significant “financial and operational difficulties”. This, according to the company, has been caused by “challenging conditions” in the local construction industry. In April, Poh Lian was placed under judicial management.

Meanwhile, United Fibre is continuing to negotiate a so-called reverse takeover with PT Golden Energy Mines, which should give the Indonesia’s coal miner a presence on the Singapore exchange. The deal was first flagged up in January 2012 but it has yet to be completed.

Thing is, United Fibre System has been struggling to turn in a profit since 2008, even though revenues have been rising. Its market value has dropped from around S$500m to about S$70m in those five years.

This, for me, highlights one of the dangers, though some might say excitement, of penny shares. It doesn’t take a lot to cause wild gyrations in the share price in percentage terms.

But for some reason, many people believe that owning a lot of shares is worthwhile or that it makes them feel like a big player in the stock market. Whilst it is true that S$1,000 would buy you over 60,000 shares in United Fibre System but only a few hundred blue chips, the latter might hold more value.

As investors, we should aim to make our money work as hard as possible for us. Taking a flier on a penny share might seem like investing but unless you know eactly what you are getting for your money, it is no better than gambling.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.