Singapore’s Best Conglomerates

In Japan they are called keiretsu. In Korea they are called chaebol. In Hong Kong they are known as Hongs. But the general term for these types of companies is a conglomerate.

Conglomerates are essentially corporations that are made up of apparently unrelated businesses. At one time these jigsaw-like companies were seen as the “in thing” as businesses grew through bolt-on acquisitions.

In the UK, companies such as Hanson, Tomkins and GEC used to wield tremendous power, though not any more. But in Japan and Korea, corporations such as Mitsubishi, Mitsui, Hyundai and Samsung still do. As does America’s General Electric and Warren Buffett’s Berkshire Hathaway.

Here in Singapore, we have our fair share of conglomerates too – four of which are stalwarts of the Straits Times Index (SGX: ^STI). At one time there were five. That is until the business assets of Fraser & Neave were unwound, unravelled and dismantled following its acquisition by Thai Beverage.

And therein lies a lesson for investors.

By and large conglomerates trade at below book value, which makes them attractive break-up targets. That’s because the market believes, rightly or wrongly, that the sum of the parts is greater than the whole.

Of the seven conglomerates listed on the Singapore market, Jardine Strategic (SGX: J37) exhibits the largest premium to its book value. It is valued at 2.7 times its assets. It is closely followed by Keppel Corporation (SGX: BN4) and Sembcorp Industries (SGX: U96). The only other Singapore conglomerate to trade at a premium to book is Jardine Matheson (SGX: J36), which is valued at 1.1 times total assets.

At the other end of the spectrum, Tuan Sing (SGX: T24) is valued at a 50% discount to book. Meanwhile Gallant Venture (SGX: 5IG) and Hong Leong Asia (SGX: H22) are valued 0.9 times and 0.6 times their asset values.

It is easy to see why some conglomerates command a hefty premium. In the case of the two Jardines, Keppel Corp and Sembcorp Industries, they have delivered total return in excess of 20% over the last ten years. Meanwhile, Tuan Sing and Hong Heong have delivered 11% and 0.8% respectively.

Peter Lynch once described companies that diversify into areas out of their core competencies as “diworsification”. In some instances that might be true. But he will have a hard time convincing shareholders of Jardine, Keppel and Sembcorp who will have seen a $10,000 investment in 2003 turn into over $60,000 after ten years.

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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.