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Should You Invest In ComfortDelGro Or Its Subsidiary, Vicom?

Conglomerates are by definition, made up of a number of seemingly different – sometimes even totally unrelated – businesses. In Singapore, we have no shortage of such companies as the Straits Times Index (SGX: ^STI) constituents like Keppel Corporation, SembCorp Industries, and Jardine Strategic Holdings (SGX: J37) comes to mind quickly.

These companies can often have other listed entities in which they hold substantial or majority stakes. For instance, Jardine Strategic Holdings owns more than half of other Singapore-listed companies like Mandarin Oriental, Hongkong Land, Dairy Farm Holdings, and Jardine Cycle & Carriage (SGX: C07).

Looking at the relationships Jardine Strategic has with its various subsidiaries, would it not be sensible to think that by owning Jardine Strategic’s shares, investors could get all the benefits that can flow through from the growth in the company’s listed subsidiaries?

As it turns out, the experience of owning say, a Jardine Cycle & Carriage, can be quite different from owning shares in Jardine Strategic Holdings. Over the past decade, investors in the former have enjoyed total returns (capital appreciation plus gains from reinvested dividends) of 750% while those in the latter have earned 680%. For a S$10,000 investment, that’s a difference of some S$7,000, so it’s not exactly trivial.

Jardine Cycle & Carriage

Jardine Strategic Holdings

Price: 12 March 2004*

S$4.57

US$4.29

Price: 12 March 2014

S$38.9

US$33.45

% Change

750%

680%

*Prices on 12 March 2004 are adjusted for dividends, stock splits, rights offerings and spin-offs.

Source: S&P Capital IQ

In fact, in cases like ComfortDelGro Corporation (SGX: C52) and Vicom (SGX: V01), where the former owns two-thirds of the latter, the difference in investment returns between owning the parent and the subsidiary can be really drastic.

Vicom

ComfortDelGro

Price: 12 March 2004*

S$0.488

S$0.62

Price: 12 March 2014

S$5.88

S$1.955

% Change

1,106%

215%

*Prices on 12 March 2004 are adjusted for dividends, stock splits, rights offerings and spin-offs.

Source: S&P Capital IQ

Looking at the figures above, it’s perhaps natural to ask why there could be such a big difference in returns between Vicom and ComfortDelGro, as compared to Jardine Cycle & Carriage and Jardine Strategic Holdings.

There are a number of reasons why that could happen: 1) The valuations of each share 10 years ago could be very different, and valuations are important determinants of future returns; 2) The growth rates of the parent and subsidiary can differ widely (for instance, profits at ComfortDelGro and Vicom gained a cumulative 97% and 249% respectively since 12 March 2004) and; 3) The subsidiary might be too small to move the needle at the parent.

In particular, the last point is an important one for investors to consider when choosing between a conglomerate-parent and its subsidiary. In 2004, Vicom had an annual profit of S$7.7 million, which was less than 4% of ComfortDelGro’s S$199 million in profits for the year. Fast forward to 2013, and even after a 270% gain, Vicom’s S$28.5 million in profits would still only be 11% of ComfortDelGro’s earnings for the year – despite a sustained period of strong growth in Vicom, it still couldn’t really move the needle for its parent.

All told, choosing to invest in a conglomerate over its subsidiaries might entail less risk given the diversified nature of the former’s various businesses. But at the same time, the investment returns coming from the parent can be very different and investors ought to consider, among other factors such as valuations, whether a subsidiary’s growth can be reflected by an adequate degree by its parent.

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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 writer Chong Ser Jing doesn’t own shares in any companies mentioned.