Warren Buffett is known as one of the greatest investors of our time. His investing acumen and emotional control are legendary and have allowed him to compound his wealth over the years, making him one of the 10 richest people in the world. By virtue of being born in the US, Buffett has had access to many global companies with strong economic moats that have grown consistently for the last few decades. But what if Buffett was born a Singaporean? Would he be able to identify great businesses here, too?
First off, we need to define what Buffett looks for in great businesses. From a study of what he has purchased over the years, the conclusion is that he loves companies with a strong economic moat, with an easy-to-understand business model, and that generate massive amounts of free cash flow. These are the basic criteria he seeks, and such businesses usually either have fair amounts of debt or no debt at all.
Here are three companies that fit Buffett’s criteria — and that he might invest in if he were a Singaporean.
1. VICOM Limited
VICOM Limited (SGX: V01) provides testing and inspection services. They have two main divisions: vehicle testing (which conducts testing and inspection for cars, taxis and buses) and non-vehicle testing.
VICOM has a simple and straightforward business — that of providing testing inspection services for vehicles as a mandatory requirement set by the Land Transport Authority. The group also has the licenses and certifications to carry out non-vehicular inspections such as the testing of essential construction materials and water and industrial hygiene testing. The business generates large amounts of free cash flow every year and has also been debt-free all the while. In addition, VICOM has also been paying an increasing dividend over the last five years and offers a historical dividend yield of 6.5% (inclusive of special dividend) at the last traded price of S$6.98.
2. Singapore Exchange Limited
Singapore Exchange Limited (SGX: S68), or SGX, is Singapore’s sole stock exchange and offers a platform for investors and fund managers to transact in equities, fixed income, and derivatives. The business is easy to understand as stock exchanges function as platforms for capital raising and for securities transactions.
As SGX is a natural monopoly, the business has a strong moat, and it is also impossible for a rival stock exchange to enter the market without the government’s approval. SGX generates very strong and consistent free cash flow thanks to its scalable business model and high operating leverage. Its dividend is paid quarterly, and SGX has raised it steadily over the years to the current S$0.30 per share. The shares offer a trailing dividend yield of 3.8%.
3. Straco Corporation Limited
Straco Corporation Limited (SGX: S85) is an operator and owner of tourism assets located in both China and Singapore. Straco owns two aquariums in Shanghai and Xiamen as well as 90% of the Singapore Flyer. It also owns the Lixing Cable Car attraction in Xi’an and has development rights to Chao Yuan Ge there.
Straco’s business model is simple: Its assets are tourist attractions, and the group earns revenue from paying visitors. The business has a strong competitive moat as its assets are located in strategic tourism spots — Gulangyu in Xiamen, for example, is a UNESCO Heritage Site, and the Singapore Flyer is located in the central southern portion of Singapore, close to Marina Bay Sands and Gardens by The Bay. Consistent free-cash-flow generation is a hallmark for the group, and it has been paying increasing dividends over the years. Straco’s historical dividend yield stood at 4.5%.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of VICOM Limited, Singapore Exchange Limited, and Straco Corporation Limited. Motley Fool Singapore contributor Royston Yang owns shares in VICOM Limited, Singapore Exchange Limited, and Straco Corporation Limited.
Motley Fool Singapore 2019