Investors inevitably encounter obstacles and problems facing the companies in which they’re invested. This is part and parcel of the investment process as no investment is without risk. An original investment thesis should include three key aspects: the competitive moat, catalysts, and the crucial “risks” section. Risks should cover both temporary and structural problems that could occur — and also the actions to be taken should each situation transpire.
The more intriguing situation is that of a temporary problem, which is often a good opportunity for investors to load up on shares more cheaply. The issue is how a problem is perceived by the public and the analyst community, and also how much time management takes to resolve such problems. Because of this, temporary issues that depress companies’ share prices may be contentious and subjective.
Here are two companies whose tough times seem to be temporary.
1. APAC Realty Ltd
APAC Realty Ltd (SGX: CLN) is a real estate services provider and one of Singapore’s largest real estate agencies with more than 6,600 salespersons. The group provides property brokerage services for primary and secondary home sales as well as rental of residential, commercial, and industrial properties.
The group’s business hinges on property transaction volumes and values. In July 2018, the Singapore government introduced its latest set of property cooling measures, which increased the additional buyers’ stamp duties and reduced the loan-to-value limits on property loans. These measures significantly increased the cost of acquiring second and third investment properties for Singaporeans and immediately dampened demand for new and resale condominiums.
The share price of APAC Realty fell from S$0.83 to S$0.58, a drop of 30%, on news of the cooling measures, and it has been hovering around S$0.50 to S$0.56 ever since. However, I believe the governance is a temporary measure to stabilise the property market, and demand for property investments should remain robust over time. It is simply a matter of time before the market recovers from its doldrums again once the over-supply is absorbed.
In the meantime, APAC Realty has a trailing dividend yield of 8% at the last traded price of S$0.56 and is trading at a price-to-earnings ratio of just 9.9 times.
2. Boustead Singapore Limited
Boustead Singapore Limited (SGX: F5D) is a conglomerate with four key divisions dealing with energy-related engineering, real estate solutions, geospatial technology, and healthcare technology.
BSL’s two key divisions are energy-related engineering, which deals with oil and gas upstream and downstream engineering, and real estate solutions, which designs and builds industrial properties for multinational clients. In 2014, thanks to the oil price crash, the oil and gas division suffered and barely broke even over the next three to four fiscal years. Following that, in 2016, the industrial property market suffered from over-supply, and rental rates declined along with higher vacancy levels. Both of these events had a detrimental effect on BSL, severely affecting its net profit and resulting in slashed dividends.
As oil is still very much a commodity used by most of the world and is also notoriously cyclical, I believe it’s only a matter of time before it will recover. Industrial real estate is also facing a cyclical downturn, and with the government continually encouraging technology, logistics, and healthcare companies to set up manufacturing facilities here, the supply should be absorbed over time. Hence, BSL’s business should recover eventually, though it may take time. The group is trading at a trailing price-to-earnings ratio of 11.5 times, with a dividend yield of 3.8%.
Strike when interest wanes
Investors should learn how to strike when interest in a company wanes — and when other investors feel pessimistic on a company’s prospects. If it has been established that such issues are temporary, or that the industry is caught in a cyclical downturn, it should be a good time to accumulate shares on the cheap.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Royston Yang owns shares in Boustead Singapore Limited. The Motley Fool Singapore has recommended shares of Boustead Singapore Limited.