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Thursday, 21 May 2020

Why I Will Not Invest In Companies Like SMRT

Source: Wikimedia

Why We Chose SMRT For Analysis?
It is delisted, so this can't and won't be a stock recommendation, but just an analysis of the business.
But, this is just an example.
Take note more of the characteristics listed instead of the company itself.

SMRT FY2019 Results
SMRT has been privatised by Temasek Holdings since 2016, but they still publish their earning results on their website.
Source: SMRT



Why Not To Invest?

1. High Capital Expenditure
Trains, buses, and cabs; they are expensive.
SMRT needs to buy these assets in order to run its business.
It then needs to invest consistently to maintain these assets at operational capacity.
High capital expenditure (CapEx) means less money (free cash flow) for investors.

Let's compare 2 companies, 1 with low CapEx and 1 with high CapEx.
For every $100 each company retains as profit, it needs to set aside a portion of the money to replace its assets some years later, eg; replace a machine 10 years after it is bought.
Some companies like SMRT may need to set aside more profits each year to cover future CapEx.
Some companies like mobile app companies, can aside less profits each year to cover future CapEx.
After all, a server definitely cost less than a whole bus.



It is always better to invest in a company that needs to re-invest less of its profits in order to continue its normal operation.
Because what it does not need to re-invest back into its business, it can be paid out to shareholders as dividends or share buybacks.
If it can re-invest the profits into expanding its business, then that's okay too.

Recommended Read: Why You Should Hate Whole Life Insurance

2. Public Good
You hear outcries when public when companies like SMRT makes record-high profits.
Because people think public transport is a need, and should not make extremely high profits.
It is precisely because of this "outcry" that companies like SMRT cannot charge higher prices (even though they are a duopoly with SBS) or be allowed to make extremely high profits.
You don't see people complaining Apple should lower their prices just because they made record profit.
But you definitely hear people complaining SMRT should lower transport fares when they make record profits.


3. Limited Growth
In addition to 'Public Good' being a 'growth limitation', SMRT is also not a natural huge growth company.

Geographical Restrictions
Given a city-state of 5.5 million people, there's a limit to how much higher growth can be.
An average person won't take more train or bus rides more than necessary.
But an average person can definitely buy an app or two on the App Store or Play Store, and more when new apps come along.

Scalability
To ferry additional 100 passengers, SMRT probably needs to buy 1 more bus (linear scale).
But, for a mobile app to add another 100 users, it just needs to buy another server, which is a lot faster than buying a bus (exponential scale).



Conclusion
We are not saying to condemn all companies that possess the characteristics we listed above.
But it might be best to avoid these companies?
At least Warren Buffett (the world's greatest investor) did.
He focused on investing companies with low CapEx in addition to a bunch of other criteria like consistent growing earnings, low debts, etc..
Maybe you should too?



Disclaimer:
Do not make any investment decisions based upon materials found on this website.
Investment Stab is not a registered investment advisor, broker-dealer, and is not qualified to give financial advice.
Investors are reminded to do their own due diligence and invest according to their risk appetite.



Recommended Read: What Happens After I Join A CPF LIFE Plan?

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