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$4.94 apiece, representing a drop of close to 50% from a 52-week high of S$9.54. But, is a steep fall alone enough to make Keppel Corp a potential bargain? Here are three good reasons why the firm may be one at the moment. Long and proven history Although the current crisis with oil prices seem to have hit Keppel Corp pretty badly, it’s worth remembering that this is not the first time the company…
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$4.94 apiece, representing a drop of close to 50% from a 52-week high of S$9.54.
But, is a steep fall alone enough to make Keppel Corp a potential bargain? Here are three good reasons why the firm may be one at the moment.
Long and proven history
Although the current crisis with oil prices seem to have hit Keppel Corp pretty badly, it’s worth remembering that this is not the first time the company has experienced similar situations.
Keppel Corp’s roots can be traced back to the late 1960s when it had just a single shipyard to its name. By the 1980s, the firm had ventured into the oil and gas sector. Therefore, Keppel Corp has had experience dealing with previous occasions when the price of oil had also crashed (in 1986, 1998, and 2008).
Yet, throughout those troubling episodes for the oil & gas sector, Keppel Corp had successfully moved into other business sectors as well, such as property, infrastructure, telecommunications, and even financials. Bear in mind that all these ventures were only possible mainly because of the firm’s profitable offshore and marine business.
Since 1989, Keppel Corp’s book value has grown from S$1.23 per share to S$6.13 per share at the end of 2015. That looks to me to be a very acceptable annual growth rate of 6.3% over the past 26 years.
Even though the current oil slump might impact its business in the short-term (and it already has, to some degree), investors need to weigh the chances of Keppel Corp either collapsing from it or recovering from it and emerging stronger than before.
Debt or no debt
Although some investors may point to Keppel Corp’s current high debt level as a sign of bad financial management by the firm’s leaders, it is worth pointing out that Keppel Corp has actually maintained a very strong balance sheet throughout the oil and gas boom that had occurred in the few years after the Global Financial Crisis of 2007-09.
To that point, Keppel Corp’s net debt to equity ratio had been below 25% from 2007 to 2014.
It was only in 2015 when Keppel Corp’s net debt had spiked from S$1.65 billion in 2014 to S$6.37 billion. The main contributing factor to that jump was Keppel Corp’s privatisation of Keppel Land in 2015.
So, Keppel Corp’s management team has actually kept a strong balance sheet at its offshore and marine business since 2007 and has not levered up to chase profits like many other firms in the sector have done.
Lastly, Keppel Corp’s valuation is not demanding at the moment. At its current price, the company is only trading at 0.8 times its book value and 5.8 times its earnings. The last time Keppel Corp’s price-to-book (PB) ratio was that low was in 2001, nearly 15 years ago.
Even if I were to value Keppel Corp based on its profit of ‘just’ S$1.1 billion in 2008 during the last big oil price drop, it would still be having a price-to-earnings ratio of just 8 at its current price.
To sum it up, Keppel Corp has had a long history of growing its business with prudence and it has really low valuations at the moment. These are reasons why the firm may just be a bargain.
But, before any investing decision can be reached, it’s important that investors consider the risks as well. That’s something I had done just yesterday so you can check out the three big risks with Keppel Corp I’m watching at the moment right here.
Investors may want to weigh the pros and cons with Keppel Corp before coming to any conclusions.
For more investing analyses 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 shares in Keppel Corporation.