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 Best World International Limited (SGX: CGN) happened to be one of them. Best World, which became the first direct-selling company to be listed here in 2004, is involved in the development, manufacturing and distribution of top-end skincare, personal care, nutritional and wellness products, to customers through…
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 Best World International Limited (SGX: CGN) happened to be one of them.
Best World, which became the first direct-selling company to be listed here in 2004, is involved in the development, manufacturing and distribution of top-end skincare, personal care, nutritional and wellness products, to customers through its direct-selling network. Its products include DR Secret range of skin care products and Avance health supplements.
Even though Best World was ranked highly on Greenblatt’s Magic Formula, would one of the greatest investors in the world, Warren Buffett, 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. However, more importantly, Buffett’s checklist, together with a deep dive into Best World’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
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 to move the needle for Berkshire.
In 2017, Best World had pre-tax earnings of S$67.8 million, which is much lower than the first criterion. Retail investors looking into Singapore-listed companies, though, should not be too strict about this rule as this might inadvertently sieve out many small-cap quality companies.
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 steady and growing earnings tend to have competitive advantages that help their businesses grow over time.
The table below shows the net profit for Best World over the past five years:Source: S&P Global Market Intelligence
From 2013 to 2017, Best World’s net profit had grown impressively year-on-year at a whopping 151% per annum. The consistent performance could mean the company has a durable competitive advantage.
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, a company that has a history of generating good ROE while employing little or no debt has a high chance of possessing durable competitive advantages.
Here’s a table illustrating Best World’s return on equity, and total-debt-to-equity ratio, from 2013 to 2017:Source: S&P Global Market Intelligence
The company ended 2017 with a high ROE of 51.2% and very little debt. Its cash balance, as at 31 December 2017, was S$82.2 million, with just S$7.4 million in total debt. It is noteworthy that Best World’s ROE had risen every single year for the past five years.
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 reminder for us to take a look at the people running a company when researching a stock.
Both Dora Hoan and Doreen Tan are founders and co-chairpersons of the group. Collectively, they have more than 70 years of experience in the direct-selling industry. On top of positions already mentioned, Hoan is the group managing director while Tan takes the helm as Best World’s president.
5. A simple business
In my view, Best World is a simple business to understand. However, it is worth noting that Buffett had this rule in place to cater to his 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 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 critical.
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 Best World, the company last traded at a stock price of S$1.59 yesterday, giving it a trailing price-to-earnings ratio of 16 and a dividend yield of 2.6%.
A Foolish conclusion
The deep dive I did earlier on Best World, and the application of Buffett’s checklist should help investors make a better-informed investing decision on the company. Stay tuned for more on the rest of the companies from the 2018 best stocks list. For a repository of all the articles in this new series that uses Warren Buffett’s acquisition criteria to analyse the 30 best stocks, you can 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.
Editor's note: A typo error in the listing year of Best World International Limited has been corrected.