These 3 Stocks May Be Facing A Big Risk

Risk can be a confusing topic in investing. While there are many investors that equate a stock’s price movement – its volatility – with risk, that may not be a good way to think about the topic. “Using volatility as a measure of risk is nuts,” the investing legend Charlie Munger once said.

I think a good way to measure a stock’s risk is to study its business fundamentals. After all, it’s a company’s business performance that is often the driver of its stock price over the long-term.

One important aspect (though it’s not the only crucial thing) of a company’s business fundamentals that relates to risk is customer concentration. When a company has only a handful of customers, its business can run into deep trouble if one or a few of them collapse or simply decide to walk away.

GT Advanced Technologies can be a good illustration of the danger of having high customer concentration. The U.S.-based sapphire glass manufacturer had to file for bankruptcy in late 2014 when its products failed to meet the requirements of its customer, iPhone maker Apple Inc. At that time, GT Advanced Technologies had likely depended on Apple for the majority of its revenue.

Let’s look at three companies in Singapore’s stock market that I think have high customer concentration risk.

The first is electronics manufacturing services provider Valuetronics Holdings Limited (SGX: BN2). In Valuetronics’ fiscal year ended 31 March 2015, it had total revenue of HK$2.43 billion. 68% of that total – or HK$1.66 billion – had come from just three customers, each of which had accounted for more than 10% of the company’s revenue that year.

Second is Starburst Holdings Ltd (SGX: 40D), a company that designs and engineers defence training facilities. In 2014, Starburst’s two largest customers were responsible for S$29.6 million of the company’s total revenue of S$39.4 million. Put another way, the firm had depended on merely two customers for a whopping 75% of its total revenue.

The third company here is the blue chip company Sembcorp Marine Ltd (SGX: S51), a builder of oil rigs and various types of vessels that are used in the oil & gas industry. There was one single customer that had accounted for 11% of Sembcorp Marine’s total revenue in 2014. Meanwhile, management had stated in a recent earnings briefing that orders from one customer – Brazilian oil and gas outfit Sete Brasil – had made up 30% of Sembcorp Marine’s total order book of S$10.4 billion at end-2015.

A Fool’s take

Having what I see as a high level of customer concentration risk need not mean that Valuetronics, Starburst, and Sembcorp Marine’s businesses would necessarily be in trouble going forward. But, it’s still an important thing that investors who are looking at the companies may want to note.

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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 writer Chong Ser Jing owns shares in Apple Inc.