Would Warren Buffett Buy Keppel Corporation?


Keppel logoWhat we know about Warren Buffett could fill volumes. The Sage of Omaha has been so open about the way that he selects his stocks that it would be a little remiss of us not to try and emulate his investing style.

So, what would Buffett make of Keppel Corporation (SGX: BN4).

Keppel Corporation is an interesting company because, in common with Buffett’s Berkshire Hathaway, it is a conglomerate. It has interests in telecoms, property and marine. It is also one of Singapore’s largest conglomerates with a market value of S$19b. The price tag, whilst massive, is unlikely to deter Buffett, provided it represents value for money. After all, Buffett’s latest acquisition, namely Heinz, cost nearly twice that at S$35b.

Buffett likes companies with low earnings volatility. In other words, he prefers companies with fairly predictable earnings. Keppel can’t exactly claim to deliver precisely foreseeable earnings, though profits have grown steadily over the years. On average, earnings have increased at compound rate of 16% a year over three years and 18% a year over five years.

Businesses with high margins are another of Buffett’s selection criteria. On that count, Keppel ranks well. Its Net Income Margin has not dipped below 13% in the last five years and the margin also compares well with those of Singapore’s other blue chips. The median Net Income Margin for the 30 companies that make up the Straits Times Index (SGX: ^STI) is around 18%.

Another thing that Buffett looks for is price volatility or more specifically, a lack of price volatility. He is not enamoured by share price movements that can’t be explained by macroeconomic activity. Keppel is likely to score well on that measure, too. Its share price volatility of 14% compares well with the overall market’s volatility of 17%.

Some of Buffett’s other selection criteria include low financial leverage and relative cheapness. This is where Keppel doesn’t fare too well. The company’s Leverage Ratio of 2.1 is higher than the market average and its current market value is around twice its book value. That doesn’t make Keppel Corporation a bad investment but it could mean that it might not make it onto Buffett’s shopping list.

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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 Director David Kuo doesn’t own shares in any companies mentioned.