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Do Conglomerate Companies Qualify as Great Investments?

There is probably no other type of company as misunderstood as the conglomerate. A conglomerate can be defined as a large company with many disparate divisions that are involved in different sectors or industries. The difficulty comes in understanding not just what each division is doing, but also how capital is allocated across the group. Thus, a clear picture may not emerge on management’s capital allocation capabilities, and investors may hesitate to sink their money into such companies.

I will introduce three conglomerates listed on SGX and offer a summary of how each operates. The idea is to explore if there are common strengths among these businesses that would qualify them to be great investments in their own right.

1. Keppel Corporation Limited

Keppel Corporation Limited (SGX: BN4) is a multibusiness conglomerate with many divisions. Its offshore and marine division constructs oil rigs for oil and gas majors, while Keppel Land is its property development arm, dealing with residential developments and commercial properties. Keppel Infrastructure invests in environmental infrastructure solutions and services, while Keppel T&T is a service provider in logistics and data centres.

2. Boustead Singapore Limited

Boustead Singapore Limited (SGX: F9D) is one of the oldest companies in Singapore and has four main divisions. These are energy-related engineering (dealing with oil and gas engineering and water and wastewater engineering), real estate solutions (design and construction of industrial properties for blue-chip clients), geospatial technology (location mapping services for corporations and governments), and healthcare technology (solutions for mobility issues and sleep apnea).

3. Haw Par Corporation Ltd

Haw Par Corporation Ltd (SGX: H02) is well known for its healthcare division’s Tiger Balm ointment, which has a global appeal. In addition, the group has three other segments: leisure (which operates an aquarium attraction in Thailand), property (rental income from leasing out commercial property in Singapore and Malaysia), and investments.

Strong asset bases

One thing in common amongst the three conglomerates above is their strong asset bases. Keppel has fixed assets and investment properties amounting to S$6.2 billion as of 31 March 2019, while Boustead has a strong net cash balance amounting to almost 25% of its share price. Haw Par owns significant stakes in both United Overseas Bank Limited and UOL Group Limited, which provide an asset layer for the group generating consistent dividends.

Buffering effects of different divisions

Another common theme among the three companies is that they have different divisions that are able to buffer one another in case of a cyclical downturn. Companies present in only one industry are hit full force by a downturn in that industry, but conglomerates, having different arms in different industries, are able to cushion the impact somewhat. This makes the overall group more stable and dependable during times of economic stress, but the flip side is that when times are good, they may also not do as well as their “pure-play” counterparts.

Conglomerates are worth a second look

Conglomerates may be tough to understand, but they are definitely worth a second look. The three companies mentioned above have long track records and excellent reputations, and investors can treat these businesses as good “asset plays” that can help to buffer their portfolios in the event of a downturn. These conglomerates also have a history of paying good dividends, which should appeal to an income-driven investor, too.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Haw Par Corporation Ltd, United Overseas Bank Limited, and Boustead Singapore Limited. Motley Fool Singapore contributor Royston Yang owns shares in Boustead Singapore Limited.