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Would Warren Buffett Buy Sembcorp Marine?

Ser Jing - Sembcorp Marine First Quarter Result, Full Steam Ahead (pic)Warren Buffett, the king of the financial one-liners, has revealed lots about his investing style through his many quips and jibes. I am sure most of us have our favourite Buffett witticisms.

One of my favourite Buffett quotes is to only buy something that you are willing to hold if the market shuts down for 10 years.

So what would Buffett make of Sembcorp Marine (SGX: S51), which is the marine and offshore arm of Sembcorp Industries (SGX: U96)? The company, which was founded in 1963 as Jurong Shipyard, certainly has longevity, staying power and pedigree on its side.

Buffett likes companies with low earnings volatility. In other words, he has an affinity for businesses that have stable and predictable earnings. Sembcorp Marine can’t claim to be a shining example of a company with low earnings volatility. But its consistently high Net Income Margin could be a testament of its competitive advantage in a cut-throat marine industry. The company provides a wide range of services that includes ship repair, ship building and rig building.

Another of Buffett’s criteria is low specific stock risk. In other words he’s not a big fan of companies whose share price volatility cannot be explained through macroeconomic activity. In that regard, Sembcorp Marine’s share price is not volatile. It fluctuates about 13%, which compares well with the volatility of 18% for the 30 companies that make up the Straits Times Index (SGX: ^STI).

Buffett also likes efficient businesses – in other words businesses that make good use of their assets. Sembcorp Marine’s Asset Turnover of 0.8 implies that it generates 80 cents of revenue for every dollar of asset employed in the business. That is higher than the average of 0.5 for Singapore’s blue chips. Its Return on Equity is also impressive. At 22% it is almost double that of the Singapore market.

All told, there is plenty to like about Sembcorp Marine. It even looks good enough to be Buffett-like business. However, there is one fly in the ointment. Its price to book is likely to make Buffett think twice or thrice in the case of Sembcorp Marine. Buffett likes to buy companies that are cheap compared to their book value. In the case of Sembcorp Marine, its market value is S$8.8 billion. Its tangible book value is S$2.5 billion.

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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.