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Would Warren Buffett Buy GMG Group?

Warren Buffett is not a big fan of commodity companies. But might he change his mind when it comes to integrated rubber producer GMG Global (SGX: AXJ)?

Warren Buffett prefers companies with low earnings volatility. In other words, he likes to know with some certainty the profits that a company could make some time in the future. This is not something that GMG Global can provide, though.

Since 2004, the company’s profits have fluctuated from a high of S$75m to a loss of S$35m. Thing is, GMG’s fortunes is tied to the price of rubber. After all, this is the major source of the company’s earnings. It plants rubber trees, its taps and collects latex from the trees and it converts the latex into sheets.

The upshot is that GMG’s margins, when times are good, can be as high as 24%. But when times are tough, margins can be negative. The erratic nature of GMG’s earnings is unlikely to impress Buffett.

That said GMG is quite efficient. Its Asset Turnover, which is measure of the amount of sales it generates from every dollar of asset employed in the business is quite high. Its median Asset Turnover of 0.6 is higher than the market average.

The company is also not heavily leveraged. It has Total Assets of S$1.07b and Total Liabilities of S$298m. Or put another way, its Leverage Ratio of 1.3 is below the market average. That could impress Buffett, since highly leveraged companies tend to be quite volatile.

Also in GMG’s favour is its low market valuation compared to its book value. The company is valued at S$440m, while the value of its Net Assets is S$727m. In other words, the market could be undervaluing the company by as much as 40%. That could pique Buffet’s interest.

There is a lot to like about GMG Global. But the inability to accurately forecast the price of rubber over time could be a deterrent for Warren Buffett. He might give this one a thumbs-down.

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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.