3 Big Risks Investors Must Know About Keppel Corporation Limited

The conglomerate Keppel Corporation Limited (SGX: BN4) has seen its share price fall badly over the past year. At the moment, Keppel Corp’s shares are changing hands at S$4.90 apiece, representing a drop of close to 50% from a 52-week high of S$9.54.

As a result of the plunge in its share price, Keppel Corp is now valued at just 5.8 times trailing earnings and offers a dividend yield of close to 7%. Some investors might consider these as very attractive valuations.

Keppel Corp may or may not be a good investment opportunity at the moment. But whatever is the case, it can still be important and useful for investors to understand the risks involved with the company.

Here are three big risks that I’m watching with Keppel Corp.

Customers’ credit risks

From end-2014 to end-2015, Keppel Corp saw its accounts receivable jump by over 30% from S$2.5 billion to S$3.3 billion. Such a huge increase in accounts receivable is unhealthy, especially when the company’s revenue is not growing at the same rate. This could mean that Keppel Corp’s customers are delaying their payments to the company.

In the fourth quarter of 2015, Keppel Corp had to impair some of its receivables from one of its largest customers, Sete Brasil. The beleagured Brazilian oil & gas company may be filing for bankruptcy soon.

With the current low oil-price environment, there is also an increased risk of Keppel Corp facing more defaults from other customers. Therefore, investors need to understand who the major clients of Keppel Corp’s offshore & marine segment are and their business conditions. By doing so, investors may get a better sense of whether more impairments of receivables may be on the way.

Free cash flow, where art thou

Keppel Corp has a cash balance of S$2.1 billion as of 31 December 2015. But, the firm’s total debt to equity ratio is quite stretched at 69%, at the moment.

With such a weak outlook in the global oil and gas sector, it might be difficult for Keppel Corp to increase its debt levels significantly to raise cash for weathering through the current storm of low oil prices.

Moreover, the company recorded negative free cash flow in 2015. If the firm continues its high cash-burn rate without having the option of borrowing more, investors may need to be prepared for possible rights issues or dilutive private placements in the future.

The state of the property sector

With the oil and gas sector in a mess, Keppel Corp’s real estate arm, Keppel Land, had helped picked up a lot of slack in 2015 for the conglomerate in terms of the bottom-line.

Yet, is the property sector really recovering or are we heading for a more drastic downturn? With a big part of Keppel Land’s property sales coming from China, would the ongoing slowdown in economic growth in China have any impact on the subsidiary’s business there?

Foolish Summary

The three big risks above are issues investors may want to think about before jumping into Keppel Corp just because it has low valuations.

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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 shares in Keppel Corporation.