In a previous article I wrote, I shared three questions investors can ask to determine how risky a share is. I would like to apply the questions to Keppel Corporation Limited (SGX: BN4), so that investors can have a better idea on how risky the Keppel share price may be.
Given that the company is one of the largest in Singapore’s stock market – it is one of the 30 constituents in the Straits Times Index (SGX: ^STI) – it could be a share that many investors pay attention to.
Here are my three aforementioned questions on risk:
1. Is there any form of concentration in the company’s business model?
2. Is the company’s valuation high?
3. Is the company’s balance sheet weak?
It’s worth noting that my trio of questions are not the only important things investors should ask when determining how risky a share is. But, they can still lead to valuable insights on the crucial subject of risk.
Keppel Corp can be considered to be a conglomerate. It has four main business segments, namely, Offshore & Marine, Property, Infrastructure, and Investments. In 2017, these segments accounted for 30.2%, 29.9%, 37.0%, and 2.9% of Keppel Corp’s total revenue, respectively.
The questions on risk
On the first risk question, Keppel Corp does not have any customer-concentration risk given that no single customer accounted for 10% or more of its total revenue in 2017. But, the company does have some form of geographical concentration risk – Singapore accounted for 66.6% of 2017’s total revenue. This risk is mitigated to a large extent by Singapore’s stable political and economic climate.
Coming to the second question, Keppel Corp currently has a price-to-earnings (PE) ratio of 30.7. Not only is this higher than the market’s PE of around 11, it is also at the higher end of the historical trading range as shown in the chart below. It’s worth noting that Keppel Corp’s PE ratio had shot up to over 70 in early 2018 as a result of depressed earnings – the company’s earnings per share had sunk by 72.5% in 2017. Notably, Keppel Corp’s earnings per share in the first half of 2018 had increased by 38.1% compared to the first half of 2017, leading to a rapid fall in its PE ratio from the early-2018 peak.
Source: S&P Global Market Intelligence
Lastly, on the third risk question, Keppel Corp has a net debt position of S$4.87 billion (total debt minus cash) as of 30 June 2018, which gives rise to a net debt to equity ratio of 39.9%. Although I would prefer to see a company that has more cash than debt, Keppel Corp’s net debt to equity ratio still looks reasonable.
A Foolish conclusion
To sum up, the Keppel share price carries a valuation risk. But, do note that this study of Keppel Corp’s fundamentals should not be taken as the final word on whether the company is a good or bad investment opportunity. See the information here simply as a good 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.