Postal and ecommerce logistics services provider Singapore Post Limited (SGX: S08) is one of the five stocks in the reserve list of the Straits Times Index (SGX: ^STI). As some of you may know, the Straits Times Index consists of 30 constituents and there’s a reserve list of stocks that are the first in line to replace any of the 30 that may fall out for whatever reason. Given that Singapore Post is a potential blue chip stock, the individual investor might ask: Does this mean the company will be a low risk investment? Thing is, a company’s investment…
As some of you may know, the Straits Times Index consists of 30 constituents and there’s a reserve list of stocks that are the first in line to replace any of the 30 that may fall out for whatever reason.
Given that Singapore Post is a potential blue chip stock, the individual investor might ask: Does this mean the company will be a low risk investment? Thing is, a company’s investment risk should depend on its business fundamentals instead of its status as a blue chip stock or a blue-chip-stock-in-waiting.
There are many aspects of Singapore Post’s business to look at in gauging how risky it is. But in here, let’s focus on two important areas.
Balance sheet risk
The presence of large amounts of debt on a company’s balance sheet can make the company fragile. When a company with a heavy debt load has difficulty repaying its loans or meeting interest payments, its shareholders may have to face a series of painful consequences. These can include an elimination of dividends, the forced-sale of assets by the firm, severe dilution, or in the worst-case scenario, bankruptcy.
Walter Schloss, an investor with a phenomenal long-term track record, summed it up nicely by saying that “I like to look at the balance sheet and I don’t like debt because it can really get a company into trouble.”
On the other side of the bridge is a strong balance sheet – one that is flush with cash and has minimal debt. A strong balance sheet can help tide a company over rough times. It can even be a source of opportunity for a company to build competitive advantages by allowing the company to go on the offensive during weak economic climates when financially weaker competitors have to batten down the hatches in order to survive.
In the case of Singapore Post, its balance sheet is not in the best of shape at the moment: It has total borrowings of S$361 million but cash of just S$185 million.
Customer concentration risk
It can be dangerous if a company has only a handful of customers or depends only on a few big customers. Just think of what would happen to its business if some of those key customers collapse or simply decide to walk away? As the saying goes, don’t put all your eggs into one basket.
Fortunately, customer concentration is not a risk that’s plaguing Singapore Post. The company’s latest annual report (for the fiscal year ended 31 March 2015) states that it “does not rely on any major customers.”
A Fool’s take
In sum, Singapore Post is a company that appears to exhibit a high level of balance sheet risk but low customer concentration risk.
But with regards to the earlier question on whether Singapore Post is a low risk investment, what we’ve seen about the company here – although insightful and important – is not sufficient for a firm conclusion to be made. I had mentioned earlier how there are other aspects of the company’s business to study in ascertaining its risk.
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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 doesn't own shares in any companies mentioned.