Keppel Corporation Limited’s Stock Has Gained 41% Over The Past Year: Is There Room For More?

Over the last 12 months, marine engineering, property development, and infrastructure conglomerate, Keppel Corporation Limited (SGX: BN4), has seen its stock price jump by an impressive 41% to S$7.66 currently.

Given the magnitude of Keppel Corp’s gains, investors may thus wonder: Is there any more room left to run for the company’s stock? There is no easy answer, but we may be able to find some clues from an investing checklist that the legendary investor Peter Lynch shared in his book One Up On Wall Street.

Lynch ran the US-based Fidelity Magellan fund from 1977 to 1990 and racked up an incredible annualised return of 29%. In One Up On Wall Street, Lynch wrote about a general checklist he had used when he was searching for investing opportunities. Let’s run Keppel Corp through the checklist and see what turns up.

1. The Price-Earnings ratio: Is it low or high for this particular company and for similar companies in the same industry (generally, low PEs are preferred)?

Right now, Keppel Corp has a PE ratio of 16.4. The chart below shows the company’s PE ratio over the past five years, and you can see that Keppel Corp’s current valuation is clearly near a five-year high. This suggests that the conglomerate’s PE is high.

Source: S&P Global Market Intelligence

For another perspective, we can look at the PE ratios of Sembcorp Industries Limited (SGX: U96) and Singapore Technologies Engineering Ltd (SGX: S63). Comparing Keppel Corp with Sembcorp Industries and ST Engineering is not apples-to-apples, since Sembcorp Industries is an utilities and marine engineering conglomerate, while ST Engineering is an engineering conglomerate with a relatively small interest in marine engineering. But, looking at the PE ratios of the three companies can still give us more context.

At the moment, Sembcorp Industries and ST Engineering have PE ratios of 17.4 and 19.7, respectively. This suggests that Keppel Corp’s PE ratio is reasonable.

2. What is the percentage of institutional ownership? The lower the better.

This criterion was added by Lynch because he thought that companies that were not noticed by institutional investors (big money managers) tended to make for better bargains.

According to Keppel Corp’s 2016 annual report, it has a high level of institutional ownership. As of 3 March 2017, Temasek Holdings controlled 20.53% of the conglomerate’s shares. Temasek is one of the Singapore government’s investment arms, and is also one of the largest sovereign wealth funds in the world.

3. Are insiders buying and whether the company itself is buying back its own shares? Both are good signs.

Over the past six months, there have been no instances of insider buying, or the company repurchasing shares.

4. What is the record of earnings growth and whether the earnings are sporadic or consistent?

Here’s a record of Keppel Corp’s earnings per share over the past decade from 2006 to 2016:

Source: S&P Global Market Intelligence

We can see that Keppel Corp has been consistently generating profits for a long time. But, it’s also worth noting that the conglomerate’s profits have been declining in recent years. In fact, its earnings per share in 2016 was 65% lower than in 2012.

5. Does the company have a strong balance sheet?

Based on its latest financials as of 30 September 2017, Keppel Corp had S$2.50 billion in cash and short-term investments, and S$8.56 billion in total debt. This results in a high net debt position of S$6.06 billion, which is not what a strong balance sheet looks like.

A Final take

On the positive side, Keppel Corp has a PE ratio that’s in line with similar companies, and a good record in generating profits over the long-term. On the negative side, the conglomerate has a PE ratio that’s near a five-year high, a high level of institutional ownership, a lack of insider buying and buybacks, a sharp decline in earnings per share over the past five years, and a weak balance sheet.

Judging from the results of the checklist, it is unlikely that Lynch would have much interest in Keppel Corp right now. But, it’s worth noting that Lynch’s checklist, as useful as it may be, should only be seen as an informative starting point for further research.

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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 owns shares in Keppel Corporation.