MENU

Four Shares to Start Investing Like Warren Buffett

In billionaire investor Warren Buffett’s 1988 annual letter for Berkshire Hathaway shareholders, he shared six criteria which he uses to evaluate private businesses for acquisitions. Given his penchant for looking at shares in almost the same way as he looks at private businesses, it’s a list that can be helpful for investors in narrowing down interesting investing opportunities.

In particular, two of his favoured criteria are as follows: 1) Shares with consistent earning power and; 2) A company with businesses that earns good returns on equity while borrowing little or no money.

Companies that exhibit a combination of those two characteristics over the years are likely to have strong competitive advantages, though that’s not always a guarantee. In any case, with those two criteria in mind, I screened through a number of locally-listed companies and here are four that managed to filter through:

1. SIA Engineering Company (SGX: S59)

The aircraft engineering outfit does maintenance, repair, and overhaul work for more than 85 airlines across the globe and is a subsidiary of Singapore Airlines (SGX: C6L). In the company’s latest third quarter results released in early February, it saw a slight 2% gain in quarterly revenue to S$284 million compared to a year ago while profits were depressed by 9.7% to S$60.5 million as its costs grew

Financial year ended

Net Income
(S$, million)

Return on Equity

Total Cash
(S$, million)

Total Debt
(S$, million)

31 March 2008

254

24%

66.4

0.0

31 March 2009

261

22%

48.5

0.8

31 March 2010

236

19%

51.4

0.0

31 March 2011

258

20%

51.6

1.7

31 March 2012

269

21%

37.4

2.5

31 March 2013

270

21%

41.6

5.7

Source: S&P Capital IQ

From the table above, we can see how SIA Engineering’s profits have grown steadily – albeit slowly – over the past five years while displaying a consistently good return on equity that’s higher than the median figure of 10% for the Straits Times Index’s (SGX: ^STI) 30 constituents. In addition, the company has been able to do so with a really strong balance sheet that had either very little or no debt.

Shares of SIA Engineering are currently priced at S$4.85 and are valued at 20 times trailing earnings while carrying a dividend yield of 4.5% based on its annual dividend for its last completed financial year.

2. Boustead Singapore (SGX: F9D)

Boustead Singapore can be said to be a mini-conglomerate given the diversity of its businesses and its relatively tiny market capitalisation of S$906 million. The company’s businesses are split into four divisions: Industrial real estate solutions; energy-related engineering; geo-spatial technology; and waste & wastewater engineering. I’ve written more about these businesses previously and it can be found here.

The company’s latest third quarter results was released a month ago on 13 Feb 2014. For the nine months ended 31 Dec 2013, even though Boustead’s profits had declined by 16% year-on-year to S$45.2 million, its operating cash flow still managed to grow substantially by 224% from S$25.3 million to S$82.0 million.

Financial year ended

Net Income
(S$, million)

Return on Equity

Total Cash
(S$, million)

Total Debt
(S$, million)

31 March 2008

51.5

34%

165

14.5

31 March 2009

60.1

33%

180

29.5

31 March 2010

43.1

21%

223

24.0

31 March 2011

52.2

24%

210

25.2

31 March 2012

55.6

23%

193

22.0

31 March 2013

81.4

29%

224

34.4

Source: S&P Capital IQ

Shares of Boustead are selling for S$1.78 apiece. At that price, those shares carry a price-earnings ratio of 12.4 and a historical dividend yield of 3.9%.

3. Nera Telecommunications (SGX: N01)

Nera Telecommunications makes the cut here with historical financials as shown below.

Year

Net Income
(S$, million)

Return on Equity

Total Cash
(S$, million)

Total Debt
(S$, million)

2008

10.2

16%

18.8

0

2009

10.7

17%

29.4

0

2010

10.9

18%

40.0

0

2011

13.5

22%

46.5

0

2012

19.4

31%

43.7

0

2013

23.5

36%

39.3

0

Source: S&P Capital IQ

The company offers products and services that deal with satellite communications, microwave radio transmission, information technology, networking infrastructure, and high-end electronics manufacturing.

In 2013, Nera Telecommunications saw its revenue dip by 0.3% to S$178 million but yet managed to grow its profit. As it turns out, the increase in the company’s profits in the year came mainly from negative goodwill that arose from its full acquisition of an associate; negative goodwill can be understood as the acquirer booking in a gain after realising that the business and assets of its acquired target has a higher appraised value than what it had paid for.

Shares of Nera Telecommunications are worth some S$0.74 each and are selling for 11 times its historical earnings. With an annual dividend of S$0.06 per share in 2013, the company’s shares have a historical dividend yield of 8.1%.

4. Kingsmen Creatives (SGX: 5MZ)

The MICE (meetings, incentives, conventions, and exhibitions) industry player not only has a hand in helping produce the interiors of retail stores for international brands like COACH, Tag Heuer and Swarovski. It also helped build certain attractions at Universal Studios, Singapore in addition to being responsible for exhibits in places like Changi Airport and the National Museum of Singapore.

Kingsmen Creative’s strong financial showing over the years, as seen below, sees it passing through the screen for companies that have growing profits and a good return on equity.

Year

Net Income
(S$, million)

Return on Equity

Total Cash
(S$, million)

Total Debt
(S$, million)

2008

14.2

36%

28.2

0.3

2009

14.9

32%

16.2

0.7

2010

15.1

28%

21.3

5.0

2011

16.3

27%

24.3

5.0

2012

16.9

24%

36.4

4.6

2013

18.4

23%

48.2

5.6

Source: S&P Capital IQ

In 2013, the company continued growing steadily with revenue moving up by 2.1% to S$296 million while profits gained 9% to S$18.4 million. Benedict Soh, executive chairman of Kingsmen Creatives, remains optimistic about the company’s prospects as he commented in the earnings release: “The next few years are going to be exciting ones for us, given the pipeline of developments that are being planned for the region. Even as we continue to enhance capabilities to meet the strong demand for our services, we will need to stay nimble and adaptive, constantly innovating for the best solutions to meet the needs of our clients.”

The company’s trading at a share price of S$0.93, which represents a trailing PE of 10 and a dividend yield of 4.3%.

Foolish Bottom Line

While these companies are by no means certain of being good investments going forward, their historical corporate performances have been great.

Like I mentioned earlier, companies that have managed to grow their earnings consistently while having strong balance sheets and a good return on equity might just have great competitive advantages that can withstand the test of time. But, that can’t be gleaned from the numbers alone and investors would still have to roll up their sleeves and get their hands dirty in an effort to understand the businesses to dig into the possible existence of strong economic moats behind such companies.

Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool's free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.  

The Motley Fool's purpose is to help the world invest, better. Like us on Facebook  to keep up-to-date with our latest news and articles.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Kingsmen Creatives and Berkshire Hathaway.