An Investing Showdown: Singapore Exchange Limited vs. Bursa Malaysia Berhad

In a previous article, I had looked at using an important financial metric, the return on invested capital (or ROIC), to evaluate the quality of a business. For convenience, the formula for the ROIC is reproduced below:

ROIC table

In general, a high-quality (low-quality) business will be able to generate a high (low) ROIC. The simple idea behind the ROIC is that a business with a higher ROIC requires less capital to generate a profit, and it thus gives investors a higher return per dollar that is invested in the business.

This is important information for investors because a company’s stock price performance over the long-term is often tied to the performance of its underlying business.

A battle between monopolies

I had looked at the ROIC of Singapore Exchange Limited (SGX: S68) recently and the company seemed to have a really high-quality business.

But, I thought it’d be useful to compare Singapore Exchange with its peer Bursa Malaysia Bhd (KLSE: 1818.KL). Bursa Malaysia, much like Singapore Exchange is in Singapore, has a monopolistic position as the stock market operator of Malaysia.

With that, let’s look at the ROICs of both Singapore Exchange and Bursa Malaysia using data from their last completed fiscal years:

Singapore Exchange and Bursa Malaysia - ROIC table
Source: S&P Global Market Intelligence; companies’ earnings report (click table for larger image)

After crunching the numbers, you can see in the table above that Singapore Exchange’s ROIC is four times that of Bursa Malaysia even on an adjusted-for-software basis. So, based on the ROIC metric alone, I can conclude that Singapore Exchange is a better business.

Moreover, Bursa Malaysia has RM203million invested in various securities like stocks and bonds, which are not related to its exchange business. If these investments are excluded, the adjusted ROIC for Bursa Malaysia is still ‘only’ 83%, which is inferior to that of Singapore Exchange.

But while Bursa Malaysia appears to have the weaker business, it should be noted that the company may still be seen as possessing excellent business economics given its ROIC is way above the general threshold of 12% to 15% for a ‘good’ business.

A Fool’s take

With the quality of their businesses, it is not hard to see why both Singapore Exchange and Bursa Malaysia have rich valuations. To the point, Singapore Exchange has a price-to-earnings (PE) and price-to-book (PB) ratio of 23 and 9.4, respectively, while the self-same metrics for Bursa Malaysia are 23 and 5.7.

While all that we’ve seen above can be important and insightful, they should be used only as a starting point for further research.

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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 contributor Lawrence Nga doesn’t own shares in any companies mentioned.