Many investors commonly wrongly assume that just because a stock is a constituent of the Straits Times Index (SGX: ^STI), it automatically makes for a safe investment. This is far from the truth. Yes, STI component stocks are some of the largest companies listed here. However, just like any other company, it is possible that an industry disruption or a poor management team may lead to negative stock returns. A prime example is Noble Group Limited (SGX: CGP). The commodities trading company, which was one of the 30 constituent stocks of the STI, was riding high just a few years ago….
Many investors commonly wrongly assume that just because a stock is a constituent of the Straits Times Index (SGX: ^STI), it automatically makes for a safe investment. This is far from the truth. Yes, STI component stocks are some of the largest companies listed here. However, just like any other company, it is possible that an industry disruption or a poor management team may lead to negative stock returns.
A prime example is Noble Group Limited (SGX: CGP). The commodities trading company, which was one of the 30 constituent stocks of the STI, was riding high just a few years ago.
However, its fortunes turned dramatically in 2015 after a short-sell report rocked the company. Mounting debt, increasing operating losses and poor management contributed to its sudden decline.
Just recently, Noble defaulted on its bond principal payment and one of its major shareholders sued the company. It is no surprise then that shares of the firm have crashed dramatically from a high of S$14.50 in 2014 to its current share price of just S$0.18 per share.
Other than Noble, there are two more STI component stocks that I will most likely never consider buying.
Singapore Press Holdings (SGX: T39)
With its range of newspapers, radio stations and magazine titles, Singapore Press Holdings is considered the top media company in Singapore. However, even with its undisputed market position, it has faced numerous challenges due to the disruption of online media and easily accessible free news.
The disruption has resulted in declining print newspaper readership over the last decade. The company has been trying to reposition itself to be a digital news source for Singaporeans. Unfortunately, despite growing its digital media revenue by a compounded annual rate of 18% since 2013, the company’s digital revenue still contributes just a meagre 12% of the group’s total media revenue and has not been able to make up for the loss in traditional print advertising revenue.
Its poor five-year track record clearly illustrates this. Since 2013, the company’s revenue has fallen steadily each year, from S$1.24 billion in 2013 to S$1.03 billion in 2017, representing a 3.6% compounded decline per year. Its core business, the media segment was the main culprit. Furthermore, the declining revenue has shown no signs of slowing down.
Of course, Singapore Press Holdings is nowhere close to the predicament that Noble Group is in. However, its declining business and inability to reinvent itself sufficiently makes it a poor investment choice in my opinion. Despite trading at just 14 times its earnings, I do not believe the company can provide shareholders with excellent returns over the next few years.
Golden Agri-Resources Ltd (SGX: E5H)
Demand for palm oil has grown over the past decade and with Golden-Agri’s position as one of the largest plantation groups in Indonesia, it is in a position to take advantage of its large scale. So why is Golden-Agri on this list?
For one, companies that deal with palm oil are susceptible to risks that are outside the control of the company. For instance, varying crude palm oil prices will affect business profitability, while poor weather conditions will affect palm oil production. Golden-Agri has shown that it is susceptible to both these risks. In the most recent quarter, revenue dropped by 11%, while underlying profit plunged by a whopping 70% due to a 12% drop in palm product output and crude palm oil price.
On top of that, its five-year track record does not make for easy reading. Despite growing its top line by 6.2% per year, net profit has fallen 22% each year, while its book value has dropped by 13% annually. Its business has also failed to return good returns on its equity, with an average of just 3.4% over the last five-year period.
In addition to its poor profitability, Golden-Agri has a considerable amount of debt on its books.
As of 31 March 2018, it had US$2.7 billion in debt and just S$4.0 billion in equity. Even more worrying is the fact that the company had an interest cover (a measure of how easily a company can pay off its interest expense with profit) of just 3.3 times. I consider an interest cover below five to be dangerous. Any fluctuations in interest rates or disruption to its profitability might result in the company being unable to pay off its interest expense.
At the time of writing, shares of Golden-Agri exchanged hands at S$0.32 per piece. Despite, this being more than 70% off its all-time high, it still trades at a price-to-earnings multiple of 64 and has a dividend yield of just 2.4%. In my opinion, investors can easily find companies with less risk and better track record at significantly more attractive valuations.
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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 contributor Jeremy Chia doesn’t own shares in any companies mentioned.