What Would Warren Buffett Make Of M1 Limited?

A high degree of predictability in earnings is something that Warren Buffett looks for when he invests in a business. M1 Limited (SGX: B2F) might provide that measure of certainty that the Sage of Omaha is looking for.

M1, which is Singapore’s third-largest telecom company, has over the last decade delivered a median net income of S$161 million. The income has also been remarkably stable – last year it was S$178 million. M1’s Net Income Margin is quite steady too. The company makes around S$18 on every $100 of sales.

Buffett likes low earnings volatility because it provides him with a high degree of confidence when he is allocating his capital. He likes to know with some certainty where and when his cash will turn up.

M1 also makes good use of its assets, which is another positive. It generates around S$1 for every dollar of asset at its disposal. The average Asset Turnover for the Singapore market is around 0.5. So, M1 is nearly twice as efficient as the typical Singapore company.

Buffett also pays close attention to a company’s balance sheet. Ideally, it should not rely on too much leverage. A company that depends on borrowings to generate its returns could be exposed to undesirable macroeconomic risks. In other words, its earnings could be affected by interest rate movements.

M1 does make use of debt. It had Total Liabilities of S$636 million and Total Assets of S$1,037 million. That equates to a Leverage Ratio of 2.6, which is higher than the Singapore market. That said, M1 has a beta of 0.3, which would imply that it is 70% less volatile than the market.

The company is not cheap, though, when its Net Assets are compared to its market value. At a Price-to-book ratio of six, investors are paying $6 for every dollar of asset. That does not leave much of a margin of safety, if anything should go wrong.

M1 has many qualities that Buffett would consider to be desirable in a stock. However, its high price-to-book ratio could cause him to wince.

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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.