APAC Realty Ltd (SGX: CLN) is a real estate services provider that was listed on the local stock market at the end of September last year. The company has three main business segments: real estate brokerage services; franchise agreements; and training, valuation, and other ancillary services. The real estate brokerage services segment is operated by its wholly-owned subsidiary, ERA Realty Network Pte Ltd, one of the largest real estate agencies in Singapore. My Foolish colleague, Chong Ser Jing, recently ranked all the stocks in the Singapore market according to the Magic Formula, an investing strategy popularised by Joel Greenblatt…
APAC Realty Ltd (SGX: CLN) is a real estate services provider that was listed on the local stock market at the end of September last year.
The company has three main business segments: real estate brokerage services; franchise agreements; and training, valuation, and other ancillary services. The real estate brokerage services segment is operated by its wholly-owned subsidiary, ERA Realty Network Pte Ltd, one of the largest real estate agencies in Singapore.
My Foolish colleague, Chong Ser Jing, recently ranked all the stocks in the Singapore market according to the Magic Formula, an investing strategy popularised by Joel Greenblatt in his book, The Little Book That Beats The Market. Ser Jing wanted to find the 30 best stocks in Singapore for 2018, based on the Magic Formula, and APAC Realty happened to be one of them.
Even though APAC Realty ranked highly on Greenblatt’s Magic Formula, would one of the greatest investors in the world, Warren Buffett, actually be interested in the company? We can’t ask him in person, but we can turn to a six-point acquisition criteria formulated by the Oracle of Omaha to give us some clues to answer the question. But more importantly, Buffett’s checklist, together with a deep dive into APAC Realty’s financials that I did recently, can help investors develop a better understanding of the company.
With that, let’s turn to Buffett’s acquisition criteria.
1. Pre-tax earnings of at least US$75 million
In 2017, APAC Realty had pre-tax earnings of S$29.4 million, which is much lower than the first criterion. But, retail investors looking into Singapore-listed companies should not be too strict about this rule as this might inadvertently sieve out many small-cap quality companies.
Buffett has this criterion in place because the conglomerate he controls, Berkshire Hathaway, is a near-US$500 billion behemoth, so his acquisition targets need to be of a certain size in order to move the needle for Berkshire.
2. Demonstrated consistent earning power
The second criterion helps Buffett determine if a company has a stable and/or growing business. Companies that have a history of consistent and growing earnings tend to have competitive advantages that helps their businesses grow over time.
The table below shows the net profit for APAC Realty over the past four years:
Source: APAC Realty 2017 earnings update; S&P Global Market Intelligence
APAC Realty’s earnings have increased consistently from 2014 to 2017, except for a decline in 2015. In all, the real estate service provider’s net income had grown at a commendable annual rate of 28.5% for the time frame above.
3. Good returns on equity (ROE) while employing little or no debt
This criterion’s purpose is similar to the second: It helps Buffett identify companies with competitive advantages. Generally speaking, a company that has a history of generating good ROE while employing little or no debt has a high chance of possessing strong competitive advantages.
Here’s a table illustrating APAC Realty’s return on equity, and total debt to equity ratio, from 2014 to 2017:
Source: APAC Realty 2017 earnings update; S&P Global Market Intelligence
The company ended 2017 with a ROE of 19.5% and no debt. Its cash balance, as of 31 December 2017, stood at close to S$62 million. In comparison, at the end of 2016, it had S$17.7 million in debt and S$18 million in total borrowings.
4. Management in place
Buffett included this criterion because he did not want to have to provide a management team when he acquires a company. For stock market investors like you and me, this criterion has no real meaning, since public-listed companies almost always have leaders in place. However, this point is a good reminder for us to take a look at the people running a company when conducting research on a stock.
According to the initial public offering (IPO) prospectus of APAC Realty, its executive officers have an average of around 20 years of experience in the real estate industry. Jack Chua, an executive director and the chief executive of APAC Realty, joined the company in 1990 (under a previous holding company of its subsidiaries). He was appointed as the head of the company in 2013.
5. A simple business
APAC Realty, as mentioned earlier, provides real estate brokerage services as one of its main businesses. It makes money by receiving project commissions from developers for primary project launches and selling commissions from sellers for resale properties, for example. It also makes money from non-brokerage means such as training, property valuation and rental.
In my view, I think APAC Realty is a simple business to understand. But, it’s worth noting that Buffett had this rule in place to cater to his own circle of competence. He is only interested in acquiring businesses that he understands. Going with this train of thought, what I think is a simple business may be complicated for you, and vice versa.
6. An offering price
This is another criterion in Buffett’s checklist that is not really applicable for stock market investors, since stocks have quoted prices that are easily seen, unlike the private businesses that Buffett evaluates for acquisitions. This criterion, though, serves as a useful reminder that the price we pay for a stock is important.
If we overpay for a stock (meaning we invest in a stock at an expensive valuation), the chances of our investment succeeding will be low. A famous quote from Buffett, “Price is what you pay, value is what you get,” rings true here.
Coming to APAC Realty, the company ended Wednesday with a stock price of S$1.11, giving it a trailing price-to-earnings ratio of 14 and a dividend yield of 1.8%.
A Foolish conclusion
The deep dive I did earlier on APAC Realty and the application of Buffett’s checklist should help investors make a better-informed investing decision on the company. I like APAC Realty’s simple-to-understand business, clean balance sheet, and high ROE. It should also do well in the years ahead with the uptick in the Singapore property market (provided there are no surprises!).
[Editor’s note: For a repository of all the articles in this new series that uses Warren Buffett’s acquisition criteria to analyse the 30 best stocks, head here.]
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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 Sudhan P doesn’t own shares in any companies mentioned.