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Tug-Of-Fools: Keppel Corporation – The Bull Argument
My name is Stanley Lim. This is my bull case for Keppel Coporation (Keppel Corp). You can read about Shares Investment’s bear case here.
As an anchor component of the Straits Times Index, a stellar reputation and track record, Keppel Corp is sometimes regarded as one of the symbols of corporate Singapore.
In this bull case, we’ll explore how Keppel Corp created a strong economic moat for its main offshore & marine business. We’ll then swing by to look at the rest of its business. And finally, we’ll finish off by looking at the company’s valuation and growth potential.
Building A Strong Economic Moat
Even though Keppel Corp is a conglomerate with four business segments, its offshore and marine sector is and always has been its bread and butter. The company is the world’s largest offshore rig builder.
Through its extensive research and development effort together with the company’s “Near Market, Near Customer” strategy, Keppel Corp has been able to retain its market leader position despite strong competition from its Korean and Chinese peers.
The offshore and marine segment continues to contribute more than 50 percent of the group’s operating profit. With an increase in global exploration and a growing production sector, Keppel Corp is well positioned to take advantage of this growth momentum.
A Diversified Conglomerate With A Focus
These days, it seems like a diversified holding company is out of fashion. Some investors are of the opinion that a diversified holding company or conglomerate is of little value to them as they can diversify their own portfolios. But let’s delve a little deeper into Keppel Corp’s business. Keppel Corp only focuses on business with synergy between one another and has divested all its non-core assets.
Using a simplified example of synergy, Keppel Corp’s offshore and marine business might be able to refer clients to its infrastructure business which in turn provides construction know-how to its property arm. Such synergy ensures that the company is maximising its resources and ensuring shareholders have added advantages from just plain diversification.
Valuation
Action, or in this case, earnings speak louder than words. Between 2000 to 2013, Keppel Corp has increased its earnings per share (EPS) for its shareholders from just $0.08 to $1.02. That is a compounded growth of 21.6 percent and it is an illustration of how strong its economic moat is.
On top of that, the company is trading at 10.5 times price-to-earnings ratio and 2 times price-to-book ratio. The return on equity for Keppel Corp has been above 10 percent since 2002, improving annually and topped at 27 percent in 2011.
Inflection Point
Why this low valuation? The main reason the company is trading at a low valuation is because the company has been facing some pressure from its infrastructure and property businesses for the past two years.
Some of its infrastructure projects are facing costs overrun due to delays, particularly in Qatar and England. The property sector is facing a sector wide slowdown due to the cooling measures by both the Singaporean and Chinese governments, which are core markets for Keppel Land.
However, given that much of its delayed infrastructure projects have been impaired and the market is well aware of the challenges of the property sector in Singapore and China, the worst might appear to be over for the company.
Together with the newly appointed management, headed by the new chief executive officer, Loh Chin Hua in 2014, this might just be the catalyst for the company to regain its growth path.
Foolish Bottomline
In our bull case for Keppel Corp, we’ve looked at the economic moat that Keppel Corp has built around its offshore and marine segment, examined its valuation, and closed off with the possible turnaround from its infrastructure and property segments. With most of the negative news out in the open and a change in management, the company looks prime for a turnaround.
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