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Would Warren Buffett Buy Sembcorp Industries?

SembcorpInvesting should be simple. If it’s not, then you are probably doing something wrong.

Sembcorp Industries (SGX: U96), appears to make things easy for investors. If you had invested $1,000 in the company in 2004, the investment would have turned into $6,000 today. That is an annual compound return of 20%, which handily beats the returns of the benchmark Straits Times Index (SGX: ^STI).

But would Sembcorp Industries be attractive enough for Warren Buffett to invest in?

Warren Buffett likes simple companies with low earnings volatility. As a combined energy, water and marine company, Sembcorp Industries appears to fulfil both criteria. Net Income over the last five years has been relatively stable. In fact, over the last five years, the Net Income Margin has been tightly clustered around a median value of 7.5%.

Sembcorp Industries is also quite efficient. Its Asset Turnover of 0.8 is higher than the average for the Singapore market. However, its use of leverage is unlikely to impress Warren Buffett. Its Leverage Ratio of 2.2 is higher than other blue chips, which have an average Leverage Ratio of 1.7. That said, interest payments are adequately covered.

Whilst Sembcorp Industries’ leverage is not excessive, it could, in Buffett’s opinion, introduce interest or macroeconomic risk. However, that does not appear to the case with Sembcorp Industries. Its share price volatility of 14% would seem to suggest that it is no more volatile than the overall market. If anything, the shares are less volatile.

It would seem that Sembcorp Industries ticks all the right boxes. However, it is probably not cheap enough to get Warren Buffett to reach for his chequebook and pen. Its current share price of S$5.40 would value the industrial conglomerate at S$9.8b, which is twice its book value.

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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.