Keppel Corporation Limited (SGX: BN4) and Sembcorp Industries Limited (SGX: U96) are two conglomerates that have similar businesses. In this article, I will compare the two companies to determine which might be a better buy.
Introducing the Contenders
Keppel Corporation is a conglomerate with four key business divisions, namely, Offshore & Marine (O&M), Property, Infrastructure and Investments. Sembcorp Industries, on the other hand, has three main businesses: Utilities, Marine and Urban Development. Sembcorp Industries owns 61% in Sembcorp Marine Ltd (SGX: S51). Both Sembcorp Marine and Keppel Corporation’s O&M division are large oil rig builders of the world.
The table below shows the market capitalisation and revenue of the two firms. Market capitalisation is as of the closing prices on 14 December 2018. Do note that all figures quoted in the tables that follow are for the full year ended 31 December 2017 (FY2017) for both companies, unless otherwise stated.Round 1: Profitability
In the first round, I will analyse the profitability of the companies in terms of net margin and return on equity (ROE). The ROE figure reveals how efficient the management is in turning every dollar of shareholders’ capital into profits.Keppel Corporation posted better net margin and ROE than Sembcorp in FY2017. Do note that the figures for Keppel exclude the one-off financial penalty and related costs of S$619 million. Including the one-time expenses, Keppel’s net margin and ROE would be 3.6% and 1.9% respectively.
Winner: Keppel Corporation.
Round 2: Growth
In the second round, I will compare the compounded annual growth rate of revenue, net profit and dividend of the two firms for the past five financial years. Companies that can grow their sales and profits steadily over time should also see their share price rise.Both Keppel Corporation and Sembcorp Industries have posted lower revenue, net profit and dividend growth over the past five years.
Do note that Keppel’s net profit growth, including the one-off financial penalty and related costs, would be a negative 41.5%. Keppel’s dividend in FY2013 excludes a special dividend in specie of eight Keppel REIT (SGX: K71U) units for every 100 Keppel shares held.
Winner: Keppel Corporation, with its less negative net profit and dividend growth.
Round 3: Valuation
As Foolish investors, it is essential to focus on the value of the business and not on the daily changes in the stock price. We will now compare the price-to-earnings (PE) ratio, price-to-sales (PS) ratio and dividend yield of the two companies. The values below are as of the closing prices on 14 December 2018.Sembcorp Industries has a lower PE ratio and PS ratio compared to Keppel Corporation. Income investors, however, may prefer Keppel due to its higher dividend yield.
Winner: Sembcorp Industries.
The Foolish Bottom Line
Final Score: 2-1 to Keppel Corporation.
Even though Keppel Corporation has emerged as the overall winner, we have not investigated other important aspects of the company such as its balance sheet strength, free cash flow situation, future growth prospects, and so on. Potential investors interested in Keppel Corporation should research more on the company before investing their money. This simple exercise covers the basics and would help to take some heavy-lifting off your back though.
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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 Sudhan P doesn’t own shares in any companies mentioned.