Top 2 Singapore Stocks to Buy in 2020

IMPORTANT: Please read the disclaimer before continuing.

With the world being unexpectedly hit by COVID-19, many industries are badly affected:

1. Retail is down because there are lesser people shopping.

2. Oil & gas, maritime is down because of lower oil prices.

3. Hospitality is down because of travel restrictions.

4. Manufacturing is hit by supply chain disruptions created by the trade war and worsened by COVID-19.

5. F&B is extremely challenging with low margins.

With such gloomy forecasts made about the future of the market, what are some resilient stocks that may thrive and present a unique opportunity for investors like us?

3 Simple Qualifying Traits of a Good Company

Before we look at any companies, let me share with you 3 simple ways to pick out a good company to invest in.

1. Profitable and high profit margins

For a business with low profit margins, any increase in costs or drop in revenue is all it takes for it to start bleeding. For example, if a company is operating at 3% profit margins, all it takes is just a 10 – 15% decrease in revenue and it would be sent under the waters.

Take a look at a low margin businesses like Macy’s, a nationwide department stores in the United States. From FY2015 to FY2020, the net profit margin fell from 5.4% to 2.2%.

That’s dangerous! A business has a very high chance of losing money if this trend continues.

In Asia, there is another low margin business called BreadTalk.

Headquartered in Singapore, Breadtalk is a F&B group with bakery, food court and restaurant businesses. It reported 2.5% profit margins in financial year 2018, then now, it is reporting losses because of poor business environment and escalating costs. If BreadTalk had higher profit margins, the Group may not have ended up with losses.

A learning point is go for companies with fat profit margins.

2. Low or no debt

A company with a fortress-like balance sheet is able to weather any kind of uncertainty. Cash is always better than debt!

When a company is making losses and has tremendous debt, the interest that is incurred could drain any remaining cash balances. It could become worse if the banks decide to seize the company and force the company into liquidation.

Using the sample of Oasis Petroleum, it had US$2,742 million of debt and US$20 million of cash as of 31 December 2019.

Yeah… don’t blink your eyes.

That is an approx. US$2.8 billion of debt! When the debtors want their money to be repaid, where will Oasis Petroleum withdraw the money?

Along with lower oil prices, it is no wonder that shareholders kept selling their shares down.

3. Companies that can THRIVE and do well regardless of any environment or macro influences

Companies like construction and property are the first to be hit during a downturn. The same goes for specialty stores, oil and gas, industrial and aerospace.

For example, if you were to compare McDonald’s with Marriott, McDonald’s would definitely be less impacted because people still have to eat daily.

Based on my experience, almost 80% – 90% of the companies listed may face difficulty growing during bad economic times. Our job is to find those exceptional ones.

Are All Listed Companies Good Companies?

One of the biggest mistakes that I made in my earlier investing days was to assume all listed companies are good companies.

That is NOT true.

Over time, I raised my standards and tightened my investment criterias.

As our money is hard-earned, we should be very careful in choosing a company to invest in.

We want to invest in the best of the best companies.

Nothing less.

Personally, I am a growth investor so I am likely to pick growth companies and avoid companies in industries that may be easily disrupted.

(RELATED: How I became a Growth Investor)

According to Capital IQ data, there are 686 listed companies in Singapore. Out of these, only 59.2% are profitable as of their trailing twelve months. The number of qualifying companies get even narrower when I apply a Return of Equity of >10% as a criteria.

(source: Capital IQ)

Based on the figures above, I applied ONLY ONE criteria – which helped me to narrow down from 406 profitable companies to only 128 companies to look at.

(Of course, I do use multiple criteria in my own investments, which I’ve shared to my students from my Growth Investing Mastery course. But for simplicity sake, let’s just look at this one criteria.)

An example of a random listed company in Singapore is Raffles Medical Group. While it earns a very nice double-digit profit margins, its Return on Equity is below 10%.

In the United States, there are several car manufacturers like Ford Motor. Despite the fact they make beautiful cars like the Ford Explorer, the Return on Equity is also below 10%.

Go and check out their share price performance lately, they are moving towards the same direction.

Now that you understand how to pick out good companies, let me share with you two companies that are on my personal watchlist.

Top 2 Companies on my Watchlist

1. iFAST

iFast Corporation (SGX:AIY) is a wealth management financial technology platform, with assets under an administration (AUA) of approximately S$10 billion as of Jan 2020.

They provide access to investment products including unit trusts, bonds, stocks, ETF and insurance products under their platform called Fundsupermart. They operate in Singapore, Hong Kong, Malaysia and other countries.

They are working towards becoming the Charles Schwab of the United States. Both of them provide low cost solutions to meet the needs of investors

iFast’s main revenue sources are recurring as they collect wrap fees, trailer fees, and platform fees. They do not incur significant expenses to collect more fees as their fees are calculated as a fixed percentage of the assets under administration (AUA). This allows them to scale their profits very quickly.

iFast’s solutions have higher customer retention when trust and familiarity is created by repeated usage from its partners.

However, their strength is also their weakness. When the prices of bonds, unit trusts, stocks and others fall, iFast’s fees would also drop because iFast revenue model works on a fixed fee of the AUA. This causes wild swings in their profits at times. Once the stock market recovers, similar to its AUA, iFast’s fees would increase back gradually.

At the moment, their China segment is temporarily pulling down the profits of the overall group. Without the loss-making segment of China, the group would have earned S$14.33M instead of S$9.52M.

Thus, you must do some adjustments before deriving the valuations of iFast.

A second thing to note: while the earnings growth does not look impressive, we have to understand that iFast has placed their priority in enhancing their technological infrastructures. The resulting increase in expenses reduced the growth of profits.

Its current pre-tax margins is around 12.9%~ (excluding China) and return on equity is around 16%~ (excluding China).

The growth trend in the Group’s net profit has however not been as obvious in the last few years, resulting from the fact that it has prioritised its efforts to further invest in and enhance its regional platform capabilities.

Based on current estimates, the Group is estimating that its operating expenses will increase by approximately 6.8% to 9.5% YoY and amount to approximately S$59.9 million to S$61.4 million in 2020. The estimated percentage increase will be significantly lower than the double digit percentage YoY increases in operating expenses that the Group has been seeing in the last few years.

This, however, does not take into account the application for the digital banking licence in Singapore, which may affect expenses from the second half of 2020 if the application is successful.

(source: iFast Press Release FY2019)

Should China continue to produce losses, on a Group level, iFast could explore options such as a spin-off or sale. Once that is done, along with modest growth in operating expenses, the earnings should jump. I am looking for this inflection point.

2. Powermatic Data Systems Limited

Powermatic data (SGX:BCY) is an Original Equipment Manufacturer (OEM), Original Design Manufacturer (ODM) and Joint Design Manufacturer (JDM) for wireless connectivity devices. The company is involved in the design and manufacturing aspects of wireless radio modules, access points and embedded boards.

It is also an authorised design centre for Qualcomm.

Previously, I cautioned against investing in distributors here. However, for Powermatic, it has moved up the value chain to provide design capabilities. That is their differentiation point.

2 Perspectives on Powermatic Valuations

Asset Perspective

When we are valuing a company from an asset perspective, we are asking ourselves whether there are assets that are backing the company’s valuation.

Powermatic owns a freehold investment property (“Harrison”) which was last valued at S$31.51 million.

According to their latest balance sheet (30 Sep 19), Powermatic had S$5.75 million (financial assets) and S$34.32 million held as cash.

Total cash plus assets = S$71.58 million.

Their total lease liability was 379k which was negligible.

Compared against their current market cap of S$64 million, their assets have already exceeded their market cap. On 31 October 2019, the Board of Directors mentioned they are looking to evaluate their options with the Harrison property, and if it is sold, the cash balances would increase significantly.

Earnings Perspective

With 5G technologies accelerating and Qualcomm being one of the leading players, Powermatic would be a big beneficiary. As such, Powermatic fits into my criteria of a growth company.

In their 1st Half FY2020 financial year, Powermatic generated $5.9M of net profit after tax. It was a 109% increase from previous corresponding year.

Some of you may be wondering whether their operations will be interrupted because of Covid-19. On 11 March 2020, the management shared that their production operations resumed back to normal levels.

With that, I still expect Powermatic to earn an approx. of $10M net profit after tax. In fact, the company is a very profitable one because it has a pre-tax profit margin of around 40%.

The current enterprise value is S$29.8M over an estimated net profit of $10M for this year, making the price multiple 3 times. For growth companies that are growing more than 30% per year, they tend to have higher price multiples. In this case, for Powermatic to be valued at 3x, the valuation is not high at all.

As such, I feel that this is a company you may want to look out for.

Conclusion

Often, many investors make mistakes because they do not know what makes a company a good company. With this small framework, I hope it delivers some value to you! Start to incorporate some of the pointers here into your next company!

PS: While you may enjoy some Singapore listed companies, have you considered investing in USA companies? They have SO much more growth and they deliver better results to investors like us!

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