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Would Warren Buffett Buy Singapore Technologies Engineering?

Ser Jing - ST Engineering First Quarter Results, Unchanged Revenue and Profit (pic)Some companies are very obviously Buffett-type businesses. And some companies are very evidently not. But in the case of Singapore Technologies Engineering (SGX: S63), it probably fits somewhere between the two.

Thing is, Buffett won’t invest in a business unless he can envision what the balance sheet would look like in 10 years’ time. Consequently, he would never buy a technology company because it leaves too much to chance. He has a point. Technology is fast-moving. It can turn a company from hero to zero at the drop of a hat.

However, ST Engineering could be different. It is true that the company is exposed to cutting-edge aerospace, electronics, land system and marine. But at the same time, its exposure is primarily through defence contracts, which tend to be more predictable.

The predictability has allowed the company to enjoy low earnings volatility, which is one of Buffett’s selection criteria. Over the last ten years, profits at ST Engineering have risen steadily – in almost step-wise fashion – from S$325m to S$565m for an average annual increase of 6%.

Buffett also likes companies with high margins. In the case of ST Engineering, the margins are good but not earth-shattering. Its Net Income Margin of 9% has been consistent but also consistently below the average of 18% for the 30 companies that make up the Straits Times Index (SGX: ^STI). Interestingly, the margin is higher than the UK’s BAE Systems (LSE: BA.), which operates in a similar sector.

But what ST Engineering might lack in margin it makes up for in efficiency. The company’s Asset Turnover of 0.8 is roughly 60% higher than the average for Singapore’s blue chips. It implies that the defence company, which is a subsidiary of Temasek Holdings, is generating 80 cents of revenue for every dollar of asset employed in the company.

Another of Buffett’s selection criteria is low share price volatility. That is to say he likes companies with low specific stock risk. At 13%, ST Engineering is one of the least volatile amongst Singapore’s 30 largest companies. The low volatility may, in part, be due to the 51% stake held by Temasek.

Buffett also like companies with low financial and operating leverage. In other words, he warms to companies with low macroeconomic risk. This is where ST Engineering could come a little unstuck. Its Leverage Ratio of 3.9 is more than twice the market average.

ST Engineering’s total return over the last ten years has been impressive. It has delivered a return of around 12% annually, with capital gains and dividends contributing almost equally. But despite the stellar returns, it is unlikely to make it onto Buffett’s shopping list.

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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.