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Tug-Of-Fools: Keppel Corporation – The Bull Argument

My name is Stanley Lim. This is my bull case for Keppel Coporation (SGX: BN4).

As an anchor component of the Straits Times Index (SGX: BN4) with a stellar reputation and track record, Keppel Corp is sometimes regarded as one of the symbols of corporate Singapore.

In this bull case, we’ll explore how Keppel Corp has created a strong economic moat for its main offshore & marine business. We’ll then swing by to look at the rest of its business. And finally, we’ll finish off by looking at the company’s valuation and growth potential.

Building a strong economic moat

Even though Keppel Corp is a conglomerate with four business segments, its offshore and marine sector is and always has been its bread and butter. The company is the world’s largest offshore rig builder.

Through its extensive research and development efforts coupled with the company’s “Near Market, Near Customer” strategy, Keppel Corp has been able to retain its market leader position despite strong competition from its Korean and Chinese peers.

The offshore and marine segment continues to contribute more than 50 percent of the group’s operating profit. With an increase in global exploration and a growing production sector, Keppel Corp is well positioned to take advantage of this growth momentum.

Source: Capital IQ

A diversified conglomerate with a focus

These days, it seems like a diversified holding company is out of fashion. Some investors are of the opinion that a diversified holding company or conglomerate is of little value to them as they can diversify their own portfolios. But let’s delve a little deeper into Keppel Corp’s business. Keppel Corp only focuses on business with synergies between one another and has divested all its non-core assets.

Using a simplified example of what it means to have synergy, Keppel Corp’s offshore and marine business might be able to refer clients to its infrastructure business which in turn provides construction know-how to its property arm. Such synergy ensures that the company is maximising its resources and ensuring shareholders have added advantages from just plain diversification.

Valuation

Action, or in this case, earnings, speak louder than words. Between 2000 and 2013, Keppel Corp has increased its earnings per share (EPS) for its shareholders from just S$0.08 to S$1.02. That is an annual compounded growth rate of 21.6% and it is an illustration of how strong its economic moat is.

Source: S&P Capital IQ

On top of that, at its price of S$10.70 (as of late March 2014), the company is trading at just 10.5 times its trailing earnings and 2 times its book value. The return on equity for Keppel Corp has also been above 10 percent since 2002, improving almost annually and topping out at 27% in 2011.

PE Ratio
(Last 12 months)
2013 2012 2011 2010 2009 2008 2007 2006
Average 11.28x 8.26x 9.21x 12.92x 8.19x 6.38x 23.63x 18.99x
High 11.83x 8.74x 9.85x 13.92x 8.58x 10.52x 27.04x 20.63x
Low 10.80x 7.67x 7.61x 11.50x 7.81x 5.02x 20.81x 17.68x
Close 11.44x 8.44x 9.42x 13.92x 8.15x 5.78x 21.99x 19.95x

Source: S&P Capital IQ

Inflection point

With such great historical performance, it’s perhaps natural to ask: Why this low valuation? The main reason the company is trading at a low valuation is because it has been facing some pressure in its infrastructure and property businesses for the past two years.

Some of its infrastructure projects, particularly in Qatar and England, are facing cost overruns due to delays. Meanwhile, the property sector is facing a sector-wide slowdown due to the cooling measures by both the Singaporean and Chinese governments (Keppel Land’s core markets are in Singapore and China).

However, given that much of its delayed infrastructure projects have been impaired and the market is well aware of the challenges of the property sector in Singapore and China, the worst might appear to be over for the company.

Together with a newly appointed management team in 2014 – headed by the new chief executive officer Loh Chin Hua – this might just be the catalyst for the company to resume its growth.

Foolish Bottomline

In our bull case for Keppel Corp, we’ve looked at the economic moat that Keppel Corp has built around its offshore and marine segment, examined its valuation, and closed off with the possible turnaround from its infrastructure and property segments. With most of the negative news out in the open coupled with a change in management, the company looks prime for a turnaround.

You can read the bear argument here.

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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 contributor Stanley Lim doesn’t own shares in any companies mentioned.