Making money isn’t the be all and end all as far as Warren Buffett’s is concerned. Buffett is more concerned about the quality of the money that is made. With that in mind, what would the Sage of Omaha make of City Developments (SGX: C09), which is one of Singapore’s most prolific property developers. Buffett is looking for businesses with low earnings volatility. He likes companies with predictable profits. That is something which City Developments can point to with pride. Over the last ten years, Net Income has crept up steadily. And over the last five years,…
Buffett is looking for businesses with low earnings volatility. He likes companies with predictable profits. That is something which City Developments can point to with pride. Over the last ten years, Net Income has crept up steadily. And over the last five years, bottom-line profit has hovered around S$700m.
The company also boasts relatively high margins, which is also likely to impress Buffett. On average, its Net Income Margin has been about 20%, which compares well with Singapore rival CapitaLand (SGX: C31). Its margin, however, is lower than that of Hongkong Land (SGX: H78).
Something else that Warren Buffett would like to see would be high levels of efficiency. Unfortunately, that is not a key attribute of property developers because of the nature of their business.
In the main, property developers have relatively low Asset Turnovers. City Development’s Asset Turnover of 0.2 is about half that of Singapore’s blue chips. While the 30 companies that make up the Straits Times Index (SGX: ^STI) generate around S$0.50 for every dollar of asset employed, City Developments generates only S$0.20.
City Developments doesn’t borrow excessively, which is likely to be a positive. Its Leverage Ratio of 1.7 is about average for the Singapore market. Its shares are not especially volatile either. A volatility of 19% is not too dissimilar to the market average.
Interestingly, City Developments is not too expensive compared to its book value of S$7.5b. With the current share price at S$10.30, the company is valued at S$9.3b, which is 20% above its book value.
On the whole, there is little to fault City Developments. But it is arguable as to whether Buffett would warm to a capital intensive business such as a property developer. The low Asset Turnover might just spoil an otherwise beautiful relationship.
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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.