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Is Keppel Corporation Limited Good Enough to Buy?

At the Fool, we believe that finding good shares to invest in first starts with figuring out how strong a company’s business is.

And to do so, we can turn to the Rule Maker framework outlined by Motley Fool Chief Executive Officer Tom Gardner in his book Rule Breakers, Rule Makers.

The Rule-Maker Framework

Here’s how the framework looks like:

  1. Is the company selling low priced, everyday items?
  2. How does the business’s gross margins look like?
  3. What about its net margins?
  4. Is the company’s sales growing?
  5. What about its cash to debt ratio?
  6. Is its Foolish Flow Ratio (a gauge of how fast the business can bring in cash) strong?
  7. Lastly, what’s your level of familiarity and interest with the business?

Figuring out Keppel Corporation

With that, let’s run Keppel Corporation Limited (SGX: BN4) through the framework today.

For some background, the business of Keppel Corp can be organised into four different units: Offshore and Marine; Infrastructure; Property; and Investments.

The business units house various subsidiaries such as real estate developer Keppel Land Ltd (SGX: K17) and infrastructure outfits Keppel Telecom & Transport Ltd (SGX: K11) and Keppel Infrastructure Trust (SGX: LH4U).

Keppel Corp also has stakes in other companies – either directly or through its subsidiaries – like investment firm K1 Ventures (SGX: K01), telecommunications outfit M1 Ltd (SGX: B2F), and oil and gas explorer KrisEnergy Holdings Ltd (SGX: SK3).

You can read more about Keppel Corp in here and here.

So, here’s how Keppel Corp fares against the Rule Maker framework (numbered in the same order as the seven criteria above):

  1. As a sprawling conglomerate, Keppel Corp thrives on large projects ordered from its customers. This typically wouldn’t be low cost projects that customers will order on a daily basis and this thus runs counter to Tom’s criteria.
  2. As a conglomerate, we can use operating margins in place of gross margins for Keppel Corp. The operating margin for Keppel Corp in 2014 came in at 17.9%.
  3. In 2014, Keppel Corp’s net margin was 18.2%, higher than the operating margin. This is due to the sizeable share of results from Keppel Corp’s associates.
  4. The nature of Keppel Corp’s business means that its top-line can be volatile. This can be seen in how the firm’s revenue had 1) dropped by 25% to S$9.14 billion in 2010 and 2) subsequently spiking by some 39% in 2012 to S$13.96 billion. Growth wise, Keppel Corp’s revenue in 2014 is up by less than 9% compared to 2009, representing an annual growth rate of just 1.6%.
  5. As of the end of 2014, Keppel Corp had $5.74 billion in cash and equivalents, and $7.38 billion in borrowings. This gives a cash to debt ratio of 0.78 times, which is well below Tom’s desired ratio of 1.5.
  6. As of the end of 2014, Keppel Corp had $5.74 billion in cash, $21.2 billion in current assets, and $11 billion in current liabilities. This gave a less desirable Foolish Flow ratio of 1.40. A major reason is down to the high stock and work in progress ($10.7 billion) that the company holds in current assets.
  7. The depth and scale of the projects which Keppel Corp undertakes may require an investor to have a strong technical background in order to have a full understanding of their competitive advantages. Furthermore, as a conglomerate with multiple businesses, Keppel Corp may be also fairly complex to untangle as a business.

Foolish takeaway

Putting a company through the Rule Maker framework can help you size up the type of opportunity at hand.

With Keppel Corp, we have a company with a volatile revenue base. The nature of the revenue may be lumpy, but Keppel Corp is at least able to grind out a good net margin. That would be important, since the company is maintaining a high level of stock and work in progress on its balance sheet. The company’s low cash to debt ratio is also not ideal, so its operational chops of will have to carry most of the financial weight.

As a final note, it is important understand that no one company is perfect.

With the characteristics defined above, the onus remains with the Foolish investor to decide if Keppel Corp’s current share price provides an appropriate margin of safety and whether it fits into his or her portfolio.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.