What Would Warren Buffett Make Of Ho Bee Land?

Warren Buffett is quite set in his ways. He once said that it is better to buy a wonderful company at a fair price than to buy a fair company at a wonderful price.

So what would he make of Ho Bee Land (SGX: H13).

Warren Buffett abhors high earnings volatility. He wants to be able to predict, with some degree of certainty, the amount of profit that a company could make.

Over the last decade, Ho Bee Land’s Net Income has been as low as S$17 million and as high as S$592 million. The median bottom-line profit was S$222 million with a standard deviation of S$160 million.

Ho Bee operates in a high margin business. Its average Net Margin has been around 40%, which is likely to please Buffett. That said, in the good years, the margin can be as high as 300%, whilst in the less good years, the bottom-line margin could be as low as 20%.

Ho Bee is not especially efficient. But that could be a feature of property-development industry. Its average Asset Turnover is 0.17. That implies that the company only generates $17 of sales on every $100 of asset employed in the business. The average for the overall market is roughly three times higher.

Right now, Ho Bee is valued at half its book value. In other words, investors are only paying 50 cents for every dollar of Net Asset. That could be tempting for value investors. But the inability to forecast earnings with any degree of certainty could be a deterrent for Warren Buffett.

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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.