Can Keppel Corporation Limited or Boustead Singapore Limited Be Singapore’s Version of Warren Buffett’s Berkshire Hathaway?

Credit: Paurian's Art Textures

The story of Berkshire Hathaway reads like a corporate fairy tale.

A dying U.S.-based textile mill that was taken over 50 years ago in 1965 by a highly successful but still relatively unknown investor has been turned by said investor into one of the best performing companies in the world today with business interests in insurance, railroads, utilities, candies, sporting goods, soft drinks, banks, and many more.

The investor is none other than Warren Buffett and under his leadership, Berkshire’s book value per share has grown at an astounding rate of 19.4% per year from 1965 to 2014. Over the same time period, the company’s shares had grown in value by an even more incredible 1,826,163%; put another way, a $1,000 investment in 1965 in Berkshire would have become more than $18 million in 2014.

Berkshire’s success

There are many factors that lead to Berkshire’s success, but I think it can be boiled down to two main areas: 1) A history of great capital allocation on Buffett’s part, and 2) the ability of the company’s many different businesses to generate huge amounts of free cash flow.

With these in mind, does Keppel Corporation Limited (SGX: BN4) and Boustead Singapore Limited (SGX: F9D) have what it takes to be the “Berkshires of Singapore”?

These two firms are chosen because they are companies which have a long history as publicly-traded entities and they are both bona fide conglomerates with multiple businesses (just like Berskhire).

The “Berkshires of Singapore”

On the capital allocation front, we can track each company’s progress on the matter through the changes in their net asset values and returns on equity.

Keppel Corp has grown its book value per share by an average annual rate of 6.35% over the past 25 years from S$1.23 in 1989 to S$5.73 in 2014. Over the past decade, Keppel Corp’s return on equity has been above 10%. While these aren’t majestic figures, they can still be taken to be a sign that Keppel Corp has done well when it comes to capital allocation.

The real story of Boustead Singapore started back in 1996 when its current Chairman, Wong Fong Fui, took control. Since then, Boustead Singapore has seen its net asset value per share grow from just S$0.11 to S$0.71 – that’s an impressive compound annual growth rate of 10.9%. Boustead Singapore has also steadily improved its returns on equity to the point where the figure has been over 20% since at least the financial year ended March 2009. All told, Boustead Singapore seems to have had a history of great capital allocation.

We’re now at the free cash flow front and in here, Keppel Corp does not fare well. The firm has had periods since 1989 when it could produce positive free cash flow; but on average, the firm has failed to produce any significant free cash flow for its shareholders over the past 25 years. That is an area of concern.

Meanwhile, Boustead Singapore has cleared this free cash flow hurdle easily; the firm has been free cash flow positive for most of its history since 1996. Moreover, Boustead Singapore’s dividends have largely stayed below the free cash flow it has generated, showing that the firm is able to reward its shareholders and yet still be able to retain cash for reinvestment.

Foolish Summary

Although this is just a simplified exercise, Boustead Singapore has at least displayed some potential in being able to become the “Berkshire of Singapore” with its ability to reinvest capital intelligently and produce free cash flow.

With that, Boustead Singapore may be a company that’s worth watching for investors.

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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 Stanley Lim owns Keppel Corporation Limited.