Would Warren Buffett Buy Khong Guan?

KhongGuanLogoBiscuits have been part and parcel of Khong Guan Flour Milling (SGX: K03) since 1947. The company is today one of Singapore’s biggest biscuit manufacturers.

In fact, you would be hard pressed not to find its products sitting on a supermarket shelf alongside the many imported biscuits that find its way into our Garden City. But would that be enough to entice Warren Buffett to take a nibble?

Warren Buffett, we know, likes companies with low earnings volatility. That is not something that Khong Guan has in abundance. The company’s Net Income has been up and down like a fiddler’s elbow.

In 2010, Net Income was S$5.9m. The following year it fell to S$4.6m and fell again to S$1.9m in 2012. Last year, net profits jumped to S$14.7m thanks to a one-off investment gain. Interestingly, revenues have risen steadily.

Net Income Margins at Khong Guan are not especially high. On average they tend to hover around the 5% mark, which is lower than the market average. The median Net Income Margin for the 30 companies that make up the Straits Times Index (SGX: ^STI) is around 15%.

Buffett likes efficient businesses. That is something in Khong Guan’s favour. Its Asset Turnover of 1.0 implies that it generates $1 of sales for every dollar of asset employed in the business. Yeo Hiap Seng (SGX: Y03) generates S$0.60 for every dollar of asset employed, which is similar to the Asset Turnover for chocolate maker Petra Foods (SGX: P34).

Khong Guan is not heavily geared company, which is something that Buffett would find attractive. In fact it had a net cash of over S$29m. Additionally, with a market cap of S$55m, Khong Guan is valued at below its book value.

Khong Guan can best be described as an enigma. It has some qualities that Buffett would like to see in a business. But at the same time, probably not quite enough to tempt him to whip out his cheque book.

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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.