Is SMRT Corporation Ltd A Great Business?

The late Philip Fisher was an investor who authored the famous and highly-regarded investing book Common Stocks and Uncommon Profits.

In his book, Fisher discussed the importance of investing in high quality businesses rather than focusing solely on valuation. He also wrote about 15 important questions about a company that he would think through when analysing the firm for a possible investment.

In here, I’d like to put some of those questions into practice with  SMRT Corporation Ltd (SGX: S53).

As a brief introduction, SMRT is a key player in Singapore’s public transport services sector, providing bus, taxi, and rail services to commuters here. These are services that are needed by commuters and there are little alternatives available, given that SMRT is close to being in a duopoly situation at the moment. The key competitor of SMRT would be SBS Transit Ltd (SGX: S61), a majority-owned subsidiary of ComfortDelgro Corporation Ltd (SGX: C52).

With that, let’s apply a few of Fisher’s 15-question framework on SMRT to see if it would be a company with a quality business.

Question 1: Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for at least several years?

Answer: If we look closer into the question, we would find out the biggest challenge facing SMRT: The company does not have full control over how fast it can grow its services.

The expansion of public transport networks in Singapore is decided by the authorities. Although there are concrete plans from the government for the rail and bus networks in Singapore to continue expanding in the future, it would be the government that tends to have the final say on who gets to be the operators of the routes. As such, there are no guarantees when it comes to SMRT winning business.

Moreover, given that there is a new business model for the public bus services sector which was announced back in 2014 by the Land Transport Authority of Singapore, SMRT might even stand to lose its existing bus routes in the future when the new model comes into play.

Question 2: Does the company have a worthwhile profit margin?

Answer: Given that SMRT’s fares are regulated by the government, the company might not have much control over its profit margins. As such, investors may not want to expect the company to be able to earn outsized profits from its business.

Foolish Summary

The two questions from Fisher’s book highlights why SMRT might fall short of being a “great” business. The company operates in a regulated market with limited growth potential.

It is true that SMRT provides an important service to the public. However, as long as it remains mainly a domestic business, it might be more conservative for investors to not expect the company to earn excessive returns or have huge growth opportunities in the future.

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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 writer Stanley Lim does not own shares in any companies mentioned.