“Buy low sell high” is a mantra that investors live by. Having a keen eye for any decrease in market price of a value stock can bring about enormous profit for investors.
Often, investors enter the market when an individual stock slips below a certain price point, where it seems to be undervalued.
However, not every stock that is going through a down phase is an attractive stock; more often than not, there are legitimate concerns about the profitability of the business that might have driven down the stock price.
Below are three stocks that investors might want to avoid despite the fall in stock prices.
1. Comfort Delgro (CDG)
CDG’s prospects do not seem too great; SBS Transit, which is 75% owned by CDG, recently lost in bidding for the contract to operate the Thomson-East Coast Line.
The contract was awarded to SMRT for a total service fee of $1.7 billion, which is to be paid out over nine years. The loss of a significant growth catalyst dampened the future outlook for CDG.
Meanwhile, Comfort has also been fighting a fierce battle against new entrants in the private hire car service industry with the entrance of Grab and Uber.
With the announcement of a potential alliance being formed between Uber and CDG, Grab has retaliated by offering a $50 discount per day for up to six months for CDG’s drivers to switch over to their taxi-fleet.
It has been reported that more than 2000 CDG taxi hirers could switch over to become Grab’s drivers.
Expecting lower taxi revenue and the absence of any growth catalyst in the short term, OCBC Research has downgraded Comfort Delgro Corporation Limited (SGX: C52) to a HOLD with fair value at $2.12.
As the provider of gateway services and food solutions at Changi Airport, an increase in airport traffic is always good news for the company.
However, passenger yields have remained weak for the airline industry despite the increase in some passengers passing through the airport. With the lower profitability of its airline customers, SATS may be negatively affected as the airlines take up cost-cutting measures.
The good news is that Qantas Airways Ltd has recently announced that it will re-route its daily Sydney-London service via Singapore and upgrade an existing Melbourne-Singapore flight from an A330 to an A380, both of which will help to increase traffic at Changi.
Should SATS be able to secure Qantas as its customer for gateway services and food solutions, profits should be lifted.
With the contract with Qantas being up in the air for now, OCBC Research gave SATS Limited (SGX: S58) a HOLD call with a fair value of $5.05, setting $4.70 and below as a decent entry price.
3. SoilBuild REIT
SoilBuild REIT has announced that it had to issue a letter of demand to its tenant NK Ingredients Pte. Ltd. for arrears that totalled up to $3.4 million.
The default in payment by NK Ingredients is a huge blow to Soilbuild REIT considering that it is one of Soilbuild REIT’s top 10 tenants by revenue, accounting for almost 6.0% of its revenue.
In the immediate short term, SoilBuild REIT is protected by an insurance guarantee that will pay a total of $5.1 million. Discounting the existing payment that NK Ingredients owes SoilBuild, the remaining insurance payout will last for another four months.
During this period, SoilBuild REIT will have to secure another tenant which is certainly a tough challenge for the trust.
NK Ingredients’s asset was purchased by Soilbuild REIT based on a sale-and-leaseback structure, which was supposed to end on 14 Feb 2028.
Given current development, the lease is assumed to have been terminated at 1 Jan 2017 due to NK Ingredient’s default on payment.
Should the assumption be right, the early termination of lease decreased the distribution per unit of Soilbuild by 10.7%, falling to 2.64 cents instead of 2.955 cents.
The asset that is currently occupied by NK Ingredients is likely to be leased out to other lessees, but future income stream arising from that asset is uncertain as of now.
OCBC Research opines that downgrading Soilbuild REIT’s fair value is likely. Should the asset remain vacant for a long time, SoilBuild REIT’s revenue will certainly be under pressure, and distribution per unit is likely to come down.
Currently, Soilbuild Business Space REIT (SGX: SV3U) received a HOLD call with a fair value of $0.67 which may decrease in the future.
Renowned financial blogger AK has noted that for SoilBuild REIT to achieve a 8.0% distribution yield, it will only make sense for investors to enter the market at $0.66, which is similar to the estimation given by OCBC Research.