Would Warren Buffett Buy SingTel?


SingTelLogoWarren Buffett and technology go together like oil and water. But SingTel (SGX: Z74), whilst it sits squarely in the hi-tech arena, is not a technology company as such. It is a utility company. There is a difference, and Buffett is not averse to those.

SingTel is the dominant player in the Singapore telecom market. It is also the number two player in Australia through its 100% stake in Optus. Additionally, it is the number one player in India via its one-third stake in Bharti.

Its dominance is reflected by its Net Income Margin, which is one of the highest in the Singapore market. Buffett is likely to be impressed by that. SingTel’s consistently high margin of around 20% compares well with the average margin for the 30 companies that make up the Straits Times Index (SGX: ^STI), which is around 18%.

Apart from consistency in earnings, Buffett also looks for efficiency. In other words he likes companies to wring out as much as possible from its assets. SingTel could figure highly on that score too. It generates around $0.45 for every dollar of asset employed in the business. That is about the same as Singapore’s blue chips.

Another of Buffett’s criteria is low macroeconomic risk. Whilst it is not always possible to eliminate macroeconomic risk altogether, low levels of borrowing can help to reduce interest-rate risk. Consequently, Buffett looks for companies that have low financial leverage. SingTel’s Leverage Ratio of 1.6 is not excessive. It is also lower than those of StarHub (SGX: CC3) and M1 (SGX: B2F).

Buffett also pays close attention to low specific stock risk. This is the volatility in share prices that can’t be explained by macroeconomic activity. In the case of SingTel, its share price volatility of 17% is almost identical to the volatility of the blue chip index. In other words, is no more or no less volatile than the market.

Buffett wouldn’t be Buffett if he didn’t try to buy something that is worth a dollar for 50 cents. This is where the case for SingTel starts to unravel a little at the seams. At $3.57, SingTel is valued at twice its book value. That is unlikely to impress Buffett even if SingTel is a telecom titan.

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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 Director David Kuo doesn’t own shares in any companies mentioned.