The Better Investment – Sembcorp Industries Limited or Keppel Corporation Limited?

Credit: Simon Cunningham

Sembcorp Industries Limited (SGX: U96) and Keppel Corporation Limited (SGX: BN4) are two large conglomerates in Singapore’s stock market that have seen their shares decline in tandem with the fall in the price of oil.

To the point, with the oil price having plunged from over US$100 per barrel in mid-2014 to around US$40 today, the share prices of Sembcorp Industries and Keppel Corporation have fallen by 29% and 31%, respectively, since the start of 2015.

Given the big declines, investors might start asking: Which of the two conglomerates is the better investment now? There are many important things for investors to look at in order to arrive at an answer, but one key aspect is the quality of Sembcorp Industries’ and Keppel Corporation’s business.

Measuring quality

In a previous article, I had looked at using an important financial metric, the return on invested capital (or ROIC), to evaluate the quality of a business. For convenience, I’ve reproduced the formula needed to calculate the ROIC:

ROIC table

Generally speaking, a high ROIC will mean a company has a high-quality business while a low ROIC will point to a business of low quality. The simple idea behind the ROIC is that, a business with a higher ROIC requires less capital to generate a profit, and it thus gives investors a higher return per dollar that is invested in the business.

Let’s look at the ROICs for both Sembcorp Industries and Keppel Corporation using the numbers from their last completed fiscal years (that would be 2015):

Sembcorp Industries, Keppel Corp, ROIC table
Source: S&P Global Market Intelligence

The table above clearly show that Keppel Corporation has the superior ROIC. In addition, Keppel Corporation has a higher PBIT margin (also known as operating margin) of 10.5%% – that’s another sign indicating that the company might have a better business than Sembcorp Industries.

It’s worth pointing out again that while all that we’ve seen above about Sembcorp Industries and Keppel Corporation can be important and insightful, they should be used only as a starting point for further research. A look at the quality of the businesses that the two conglomerates have shouldn’t be taken as the final word on their investment merits.

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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 contributor Lawrence Nga doesn’t own shares in any companies mentioned.