When performing due diligence on a potential investment, it’s important for investors to know what to look for and how to dig up important aspects of a company to study. While the most obvious part of due diligence would be the financials, there also needs to be effort expended in finding out other qualitative aspects of the business, such as acquisition history and how a business reacts to hardship and challenges.
It’s easier to illustrate these points using examples, and I will focus on two companies – Singapore Exchange Limited (SGX: S85) and Boustead Singapore Limited (SGX: F5D), also known as SGX and BSL, respectively. These two companies have had their fair share of ups and downs over the years, and represent good examples of how investors should look at their historical corporate moves and financials to paint a more complete picture of how each company is doing.
For both SGX and BSL, an investor should dig out the at least five years, if not ten, of historical financials. The key here is to observe how the group as a whole has performed over the period, and the metrics to look out for would include revenue growth, profit growth, gross and net margins, divisional performance, free cash flows (FCF) and dividends.
For SGX, it has been reporting steadily rising revenue over the years, while net profit for FY 2019 recently hit an 11-year high. Derivatives have also taken up 52% of its total group revenue for the first time, marking a shift in the importance of derivatives to the overall group. As for BSL, its revenue and profitability suffered in 2014-2015 due to the oil price crash and the over-situation in the industrial real estate market, but it has managed to generate healthy FCF in spite of this and has also paid out dividends (though this has declined from the levels seen in FY 2014/2015).
Mergers and acquisitions
The next aspect to look at would be mergers and acquisition (M&A) activity for each company. Companies normally rely on M&A to boost areas they are weak in, or to immediately add on a promising business to bolster the group’s overall earnings. For SGX, it has conducted bolt-on, small acquisitions over the years such as BidFX and SmartKarma. BSL has adopted a different approach, preferring to bide its time over the years to look for a suitably large acquisition. This came along in June 2018 when it bought WhiteRock Medical for S$19 million to create a new division for the group, now known as “Healthcare Technology”.
Reaction to challenges and competition
Investors should also take note of how each company reacts to challenges such as competitive threats and industry/sector slowdowns. This provides a good indication of the quality of management and their ability to adapt and evolve to keep up with the times. For SGX, CEO Loh Boon Chye steered the group to focus on derivatives when its equity business languished and suffered due to lower trading volumes. For BSL, CEO Wong Fong Fui adopted a prudent stance and cut costs for its oil and gas division when it started to underperform. The group has just reported a profitable result in its latest Q1 2020 earnings for this division. For the real estate division, it invested in the latest technologies and capabilities to remain relevant while riding out the downturn and also expanded successfully into countries such as Malaysia and Vietnam.
Putting it all together
The above examples illustrate the due diligence and fact-finding process for two companies and showcase how investors can get a better idea of how a company has performed by researching these various aspects.
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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 Singapore Exchange Limited and Boustead Singapore Limited. Motley Fool Singapore contributor Royston Yang owns shares in Singapore Exchange Limited and Boustead Singapore Limited.
Motley Fool Singapore 2019