ROEs of SGX mid-caps are a mixed bag, small-caps lag

[SINGAPORE] A study has found that the average small-cap company on the Singapore Exchange (SGX) posts a return on equity (ROE) of negative 4.44 per cent, although the median small-cap company’s is a positive 1.58 per cent.

The figures are based on five-year adjusted average ROE numbers from publicly available Bloomberg data.

Small-caps mostly cluster in low single digits or negative territory: Marco Polo Marine at 6.4 per cent, Wee Hur at 4.2 per cent, Cosco Shipping at 1.5 per cent, and embattled water treatment firm Hyflux at 0.8 per cent.

Further down, ASL Marine posts a negative 16.4 per cent, and Mercurius Capital Investment has one of the lowest figures in the entire dataset at a negative 66.8 per cent.

Even so, a handful of small-caps outperform most large-caps, and even most mid-caps, by a wide margin. Azeus Systems has an ROE of 33.7 per cent, HC Surgical Specialists offers 47.9 per cent and Aztech Global clocks in with 58.9 per cent, underscoring the variation that exists.

Among mid-caps, there is a roughly 300-basis-point gap between the average and median returns – suggesting that a handful of companies with particularly high ROEs are pulling up the average. This is “evidence of a large performance dispersion”, Chia Tse Chern, group head of investments, asset management at brokerage CGS International Securities, told The Business Times.

PropNex has an ROE of around 44.8 per cent, StarHub has 40.9 per cent and AEM has a return of 32.3 per cent.

At the other end of the spectrum, a larger group of mid-cap companies has single-digit ROEs, including Centurion at 9.2 per cent, NetLink NBN Trust at 3.6 per cent and Frasers Property at 1.6 per cent.

Large-caps similarly show a spread. DBS has an ROE of 14 per cent, Jardine Matheson has 11.7 per cent and OCBC has 10.7 per cent, while ComfortDelGro sits at 5.1 per cent.

At the bottom, large-cap City Developments Ltd has a negative ROE of 3.8 per cent and Seatrium, a negative 22.1 per cent.

Why ROE?

ROE has long been a focus among investors in listed equities. Singapore’s three major listed banks and other blue-chip names cite the metric as a measure of a company’s medium to long-term performance outlook.

Calculated by dividing a company’s net profit by shareholders’ equity, ROE rises when profits increase, equity declines or both. This makes the metric a useful lens through which to assess how effectively a company is deploying shareholders’ capital.

Based on the numbers, large and mid-cap companies are generally getting more efficient at generating returns for shareholders over the past three years, while small-caps have gone the other way.

“Based on our analysis of the data, rather than a broad decline, we see that the market has really just split into two,” said Chia.

Commenting on the improved returns of large and mid-cap stocks, he noted that while large-cap companies have delivered relatively consistent performance, mid-caps show a much wider range of outcomes.

“The big companies compound steadily, almost interchangeably, and the gap between them is tiny. For mid-caps, the performance gap within the group is noticeably wider,” he said.

Below the mid-cap segment, Chia sees the market becoming more of a lottery, with “very good and very bad tickets”.

Among small-caps, the average company loses money while the median company is profitable. This, he said, can only mean that there are poor performers sitting alongside “genuine gems”.

“What investors need to note is that the further you go beyond the blue chips, the more stock selection matters,” noted Chia.

Looking more closely at banks, Charmaine Tan, research analyst on the research and portfolio management team at FSM Global, said that “their scale, diversified revenue streams and growing wealth-management businesses have helped support profitability”.

Thilan Wickramasinghe, head of Singapore research and regional financials at Maybank Investment Banking Group, noted recently that DBS is “delivering on all fronts”, leveraging growth engines across wealth management, corporate banking, small and medium-sized enterprises and trading, despite significant external uncertainty.

This gives “strong visibility” that the bank can deliver an ROE of more than 17 per cent in the medium term, justifying its premium valuation, he added.

Wickramasinghe expects OCBC’s ROE to rise to 14 per cent by 2028, from 12.6 per cent in 2025.

What is behind the split?

Chia points to two forces that have increasingly separated stronger performers from weaker ones across the market: the uneven ability of companies to benefit from artificial intelligence, and the greater pressure that higher interest rates have placed on asset-heavy businesses.

“AI made winners and losers, and interest rates penalised those carrying heavy assets,” he said, adding that large and mid-caps proved resilient through this.

While the banks captured the spotlight, he believes the market largely missed the fact that the mid-tier also improved.

The picture is less consistent among smaller companies.

With fewer financial resources, some small caps may have less capacity to invest in AI and the technology and talent needed to put it to work. At the same time, their more-limited financial headroom can make higher funding costs more difficult to absorb, weighing on margins and returns.

Tan sees a structural dimension to this. The long-term pressure on ROE, she said, is likely driven by a combination of higher capital requirements, greater capital intensity and changes in balance-sheet structures.

“As companies retain more capital and maintain larger equity buffers relative to their earnings, this can dilute ROE,” she noted. Dividends and share buybacks, she added, can help companies optimise excess capital and support ROE. However, retaining more capital for future growth can have the opposite effect.

Real estate investments trusts (Reits), however, are a different kettle of fish. Average ROE among Reits has declined, but Chia argues that this reflects their structure and mandate rather than a deterioration in performance.

For instance, Frasers Hospitality Trust and Capitaland Ascott Trust both have five-year adjusted ROEs of 1.9 per cent, while Mapletree Industrial Trust has a higher ROE at 7.9 per cent.

“They are built to pay the investors, not to compound (value); so investors should be assessing them based on distributions and asset value,” he said. But even there, the gap between the best and worst-run Reits has become bigger, he noted.

Making the best use of capital

While ROE is an important metric, market observers told BT that it alone does not tell the full story. How effectively capital is allocated matters as much as the headline number.

Clearer disclosure around dividend policy and capital allocation, they added, would help investors and boards assess whether capital is being put to good use. This comes as the SGX Regulation pushes listed companies towards clearer disclosure of their dividend policies.

“For some companies, particularly those with diversified or legacy businesses, capital can remain tied up in assets that may no longer generate attractive returns,” said Emily Poon, CEO of the Singapore Institute of Directors.

Importantly, she added, a low or declining ROE should not, in itself, be taken as an indication of poor governance.

FSM Global’s Tan believes that ROE should be read alongside return on assets (ROA), leverage and free cash flow generation.

ROA shows how efficiently a company generates profit from its asset base, while leverage reveals whether a high ROE is really just debt doing the work.

“Investors should also consider whether the company consistently generates returns above its cost of capital, as this is a better indication of whether it is truly creating value for shareholders,” she added.

Others see return on invested capital (ROIC) as a more useful metric, because it links business performance more directly to the capital required to generate those returns.

“ROIC can help boards identify businesses that are consuming significant amounts of capital without generating adequate returns, particularly within diversified groups,” said Poon, adding that boards should consider the metric as part of a broader set of performance indicators.

Chia noted that a 15 per cent ROE built on 8 per cent ROIC could simply reflect the effects of leverage.

“We have seen how this has played out with the interest-rate situation over the last few years,” he said.