There are many conglomerates in Singapore’s stock market. But two of the more prominent ones – by virtue of them being blue chips – are Keppel Corporation Limited (SGX: BN4) and Sembcorp Industries Limited (SGX: U96). There’s even an important similarity in both companies: They depend on the oil & gas industry for a large chunk of their business as they each own marine engineering firms that build various types of vessels and oil rigs. In 2015, Keppel Corp’s offshore and marine arm, which is wholly-owned, contributed to 61% of total revenue. In the case of Sembcorp Industries, its offshore…
There are many conglomerates in Singapore’s stock market. But two of the more prominent ones – by virtue of them being blue chips – are Keppel Corporation Limited (SGX: BN4) and Sembcorp Industries Limited (SGX: U96).
There’s even an important similarity in both companies: They depend on the oil & gas industry for a large chunk of their business as they each own marine engineering firms that build various types of vessels and oil rigs.
In 2015, Keppel Corp’s offshore and marine arm, which is wholly-owned, contributed to 61% of total revenue. In the case of Sembcorp Industries, its offshore and marine business, which accounted for 52% of total revenue in 2015, comes in the form of its 61% ownership of Sembcorp Marine Ltd (SGX: S51).
There are other similarities. Both Keppel Corp and Sembcorp Industries’ shares have gotten smashed over the past 12 months, declining by 29% and 40% in price, respectively. That’s far greater than the Straits Times Index’s (SGX: ^STI) loss of ‘only’ 14% in the same period. With the big declines in both companies’ shares, the individual investor might ask: Which of the two would be the stronger investment at the moment?
Let’s look for clues to the answer by studying a few key aspects of the two companies’ business fundamentals such as their financial strength, track record of growth, and valuation. These things are important because a company’s business is often the main driver of its stock price over the long run.
The thing I’m interested in here is the shape of Keppel Corp and Sembcorp Industries’ balance sheet.
A weak balance sheet that’s bloated with debt can be a risky thing for investors. When a company has trouble servicing or repaying its loans, its shareholders may have to face painful consequences such as dilution, involuntary asset sales by the firm, the elimination of dividends, and in the worst case scenario, bankruptcy.
As of 31 December 2015, Keppel Corp had S$8.26 billion in total borrowings but just S$2.12 billion in cash and short-term investments. This translates to a net-debt to equity ratio of 51%. With Sembcorp Industries, it had a net-debt to equity ratio of 65% at end-2015 with its S$6.83 billion in total borrowings and S$1.61 billion in cash.
While Keppel Corp has the slightly stronger balance sheet with its lower net-debt to equity ratio, it’s worth noting that both companies’ balance sheets are not in the best of shape.
Track record of growth
Growth in a business over time is important because it is what builds up a company’s real economic worth. A company’s track record can give us some guidelines on what to expect from it in the future – it’s not a perfect indicator by any means, but it’s still useful nonetheless.
The metrics I want to look at in here are Keppel Corp and Sembcorp Industries’ revenue, profit, and operating cash flow.
Let’s run this through with Keppel Corp first using data from S&P Global Market Intelligence. In 2010, Keppel Corp had earned S$9.14 billion in revenue, S$1.51 billion in profit, and S$450 million in operating cash flow. The company ended 2015 with S$10.3 billion in revenue (up just 2.4% per year from 2010), S$1.52 billion in profit, and a negative S$705 million in operating cash flow. So, there’s sadly been no growth from Keppel Corp over the past five years.
Next up is Sembcorp Industries. Here’s how its track record of growth looks like:
- Revenue: S$9.54 billion in 2015, an increase of just 1.72% annually from S$8.76 billion in 2010
- Profit: S$549 million in 2015, a 31% decline in total from S$793 million in 2010
- Operating cash flow: a negative S$761 million in 2015, representing a drastic fall from the positive S$1.70 billion generated in 2010
Turns out, it’s a case here of finding the best block in a horrible neighbourhood. Because of Keppel Corp’s slightly higher revenue growth and flat profit, I think it’s reasonable to say that the company has had a stronger history of growth than Sembcorp Industries.
Even the best business can be a lousy investment if bought at too high a price. That’s why it’s important to have an eye on the valuations of a company’s stock.
There are many ways to value a conglomerate, but I’m not here to have a precise read of the intrinsic values of Keppel Corp and Sembcorp Industries. I want quick guides and for that, the simple price-to-earnings (PE) and price-to-book ratios will suffice.
Here’s how Keppel Corp and Sembcorp Industries stack up:
- Keppel Corp: Current share price of S$6.06, PE of 7.2, and PB of 0.99
- Sembcorp Industries: Current share price of S$3.15, PE of 10.8 and PB of 0.88
It looks like a tie here, with Sembcorp Industries sporting a higher PE ratio but lower PB ratio.
A Fool’s take
In summary, Keppel Corp appears to be the stronger stock at the moment with its relatively healthier balance sheet and slightly better history of growth. But, both conglomerates have issues – they both have substantial levels of debt on their balance sheets and they’ve essentially been unable to grow over the past five years.
The saving grace here is that both Keppel Corp and Sembcorp Industries have lower-than-average valuations. To the point, the SDRP STI ETF (SGX: ES3) – an exchange-traded fund which tracks the fundamentals of Singapore’s market barometer, the Straits Times Index (SGX: ^ST) – had a PE and PB ratio of 11.7 and 1.1, respectively, as of 16 March 2016. The lower valuations of the two conglomerates may help provide some margin of safety for investors.
With all that said, there’s another important thing for investors to note: While all that we’ve seen with the two conglomerates here are insightful and important, they should not be taken as the final word on the investing merits (or lack thereof) of both companies. Deeper research is needed before any investing decision can be reached.
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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 Chong Ser Jing doesn't own shares in any companies mentioned.