Has Keppel Corporation Limited Reached Its Low?

Shares of property development and marine engineering conglomerate Keppel Corporation Limited (SGX: BN4) have been big losers over the past 12 months.

To the point, the company’s stock price had fallen by 35% to S$5.78 over the year through 29 March 2016. In contrast, Singapore’s market barometer, the Straits Times Index (SGX: ^STI), had lost ‘just’ 18% of its value within the same period.

The big decline in the stock price of Keppel Corp may cause some bargain hunters to sit up and take notice. But, not every share that has fallen hard is a genuine bargain – what’s more important is whether the share has fallen to a point where it represents good value. So, can Keppel Corp be considered a value stock right now?

An investing check-list prepared by Benjamin Graham may help provide some insight to the question’s answer from one perspective. For the sake of those who haven’t heard of Graham, he’s the famous mentor of billionaire investor Warren Buffett and the author of the influential investing texts, Security Analysis and The Intelligent Investor. In a way, Graham can even be seen as the intellectual father of value investing.

Graham’s checklist consists of 10 points and it’s a way to gauge a company’s earnings power and balance sheet strength.  Let’s put Keppel Corp through the paces to see how it’d fare against Graham’s checklist:

1. An earnings-to-price yield that’s at least twice the AAA bond rate.

An earnings-to-price yield is calculated by dividing a company’s stock price with its earnings per share. Those of you who are sharp may recognsie this as the inverse of the price-to-earnings (P/E) ratio.

Meanwhile, a triple-A rating is the highest grade on the scale that credit rating agencies use to rate bonds – it’s meant for the bonds that the agencies think are the safest.

Keppel Corp passes this criterion easily. At its closing price of S$5.87 yesterday, the company had an earnings-to-price yield of 14.3% thanks to its trailing earnings per share of S$0.84. For a useful AAA bond rate, let’s use the Singapore government 10-year bond yield of 1.96%; Singapore currently has a triple-A credit rating from four credit rating agencies.

I trust it’s obvious to see that Keppel Corp’s earnings-to-price yield is way more than twice (it’s more than seven times, in fact) the triple-A bond yield.

Verdict: Yes

2. A P/E ratio that is 40% or less than the highest P/E ratio the stock has reached over the past five years.

Keppel Corp had a maximum PE ratio of 12.83 in the last five years. A 40% discount to that would mean that Keppel Corp has to have a P/E of 7.7 to pass this stage. At a stock price of S$5.87, the company has a P/E of 7.0, which comes in below the bar.

Verdict: Yes

3. A dividend yield that is at least two-thirds that of a triple-A bond yield.

We’ve seen that a triple-A bond yield is 1.96% at the moment. With a stock price of S$5.87 and a dividend of S$0.34 per share in its last-completed fiscal year, Keppel Corp has a fat dividend yield of 5.9%. This again easily fulfils the criterion.

Verdict: Yes

4. A stock price down to two-thirds or less of the company’s net tangible assets (NTA) per share.

Keppel Corp’s NTA stood at $S6.07 per share as of the end of 2015 (the latest financials available for the company). Two thirds of that would imply a stock-price-hurdle of S$4.04. Keppel Corp’s stock price can’t pass here.

Verdict: No

5. A stock price down to two-thirds of net current asset value (current assets minus total liabilities).

A quick calculation of this results in a negative S$429 million in net current asset value for Keppel Corp. As such, this criterion cannot be satisfied.

Verdict: No

6. Total debt less than net tangible assets (NTA).

At the end of 2015, Keppel Corp’s total debt stood at S$8.26 billion while its NTA stood at S$10.99 billion. This gives the company a tick in the box here.

Verdict: Yes

7. A current ratio (current assets divided by current liabilities) of 2 or more.

Based on Keppel Corp’s latest financials, it has current assets of S$16.68 billion and current liabilities of S$9.91 billion. This gives a current ratio of 1.68, which is some way off from the target of two or more.

Verdict: No

8. Total debt that’s equal to or less than twice the net current asset value.

As Keppel Corp has a negative net current asset value, it can’t satisfy this criterion.

Verdict: No

9. Earnings growth of 7% compounded over the past 10 years (or a doubling of earnings over the past 10 years).

Keppel Corp’s earnings per share had grown at a compound annual rate of 9.9% from S$0.328 in 2005 to S$0.84 in 2015, according to data from S&P Global Market Intelligence.

Verdict: Yes

10. No more than two years of declining earnings of 5% or more over the past 10 years.

This is one more criterion that the company has failed to meet. Data from S&P Global Market Intelligence show that Keppel Corp’s earnings per share had declined by 7.4% in 2010, 18% in 2013, and 19% in 2015.

Verdict: No

So, how has Keppel Corp done in sum? In the 10-point checklist, Keppel Corp has hit only five of the criterion, which would make it seem like the company’s not at a rock-bottom value price. But, it should be noted that Graham’s checklist, as useful as it is, is meant to only be a guideline. It is also a look at Keppel Corp’s value proposition from only a single perspective. Deeper research would be needed before any investing decision can be made on the company.

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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 Esjay own shares in Keppel Corporation.