A Better Investment – Singapore’s Largest Conglomerate vs. Malaysia’s

The major stock market indices in Singapore and Malaysia – the Straits Times Index (SGX: ^STI) and the Kuala Lumpur Composite Index, respectively – are home to some of the largest conglomerates in the South-east Asia region.

On the local front in Singapore, Keppel Corporation Limited  (SGX: BN4) is currently the largest conglomerate in the STI following last year’s removal of Jardine Matheson Holdings Limited (SGX: J36) and Jardine Strategic Holdings Limited (SGX: J37) from the index. Keppel Corp has a market capitalisation of S$12.0 billion currently and made up 4% of the STI at the end of 2015.

In Malaysia’s case, the largest conglomerate would be Sime Darby Bhd (KLSE.4197.KL), with a market capitalisation of RM46.3 billion. The company has a 5% weighting in the KLCI as at end-2015.

Their business

Keppel Corp has three main business segments: Offshore & Marine; Property; and Infrastructure.

The first segment is Keppel Corp’s largest revenue contributor. Keppel Corp has a sizeable property development business under the second segment from the recently privatized Keppel Land. As for the last segment, Keppel Corp has interests in many different areas such as logistics through a stake in Keppel Telecom. & Transport. Ltd (SGX: K11), public infrastructure via Keppel REIT (SGX: K71U), and data centres with Keppel DC REIT  (SGX: AJBU).

As a conglomerate, it’s no surprise to learn that Sime Darby also has multiple interests in various sectors. The company has business interests in sectors that include agriculture, real estate, healthcare, retail, energy, and more.

Would Keppel Corp or Sime Darby be the better investment? There’s no clear cut answer to the question, but we can get some insight from a study of the two companies’ business fundamentals.

A look beneath the hood: The financials

Source: S&P Capital IQ

In terms of generating a return on their equity, Keppel Corp seems to be more effective than Sime Darby. Keppel Corp has produced an average return on equity of 21% over its past five fiscal years and has outperformed its Malaysia-listed peer by a decent margin.

Source: S&P Capital IQ

The strength of both companies’ balance sheets are roughly similar given their close debt to equity ratios at the moment. That said, Keppel Corp does have a slightly better balance sheet with its debt to equity ratio of 54% as of 30 September 2015; Sime Darby’s debt to equity ratio clocked in at more than 60% for the same period.

Source: S&P Capital IQ

When it comes to revenue growth, Sime Darby seems to be faster than Keppel Corp. The former’s revenue had been growing at an annual rate of 5.5% over the past five years while the latter’s revenue had only been able to step up by 3.2% per year.

Another look beneath the hood: Valuation

Sime Darby currently offers a 3.2% dividend yield and trades at about 22 times trailing earnings. Meanwhile, Keppel Corp’s yield is 7.4% and it has a price-to-earnings (PE) ratio of just 6.4. It’s clear that Keppel Corp has the lower valuations here.

A Fool’s take

Both Sime Darby and Keppel Corp are some of the largest conglomerates in their respective countries. And based on what we’ve seen, Keppel Corp is the one with the higher returns on equity, stronger balance sheet, and cheaper shares.

But before you jump to the conclusion that Keppel Corp must be the better investment, it’s worth noting that a deeper study is needed before any investing decision can be made.

For more insights on dividend investing and to keep up to date on the latest financial and stock market news, sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.

Also, like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.

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.