Is Keppel Corporation Limited a Risky Stock?
In a previous article I wrote, I shared three questions investors can ask to determine how risky a stock is. Here are the questions:
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?
My questions are not the only important things investors should assess when determining how risky a stock is. But, they can still lead to valuable insights on the crucial subject of risk.
With the three questions in hand, I thought it’d be interesting to look at how risky Keppel Corporation Limited (SGX: BN4) may be at the moment. Given that the company is one of the largest in Singapore’s stock market (it is one of the Straits Times Index’s (SGX: ^STI) 30 constituents), it could be a stock that many investors pay attention to.
Keppel Corp can be considered to be a conglomerate. It has four main business segments, namely, Offshore & Marine, Property, Infrastructure, and Investments.
In 2016, the Offshore & Marine, Property, and Infrastructure segments accounted for 42.2%, 30.1%, and 25.8% of Keppel Corp’s total revenue, respectively.
The questions on risk
With regard to the first question on risk, Keppel Corp does not have any high level of customer-concentration given that no single customer accounted for 10% or more of its total revenue in 2016.
But, the company does have some form of geographical concentration risk – Singapore accounted for 65.1% of 2016’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 15.8. Not only is this higher than the market’s PE of around 13, it is also near a five-year high as shown in the chart below:
Source: S&P Global Market Intelligence
It’s worth noting as well that Keppel Corp’s earnings per share in 2016 had declined by 49% compared to 2015.
Lastly, on the question regarding the company’s balance sheet strength, Keppel Corp has a significant net debt position of S$6.97 billion (total debt minus cash), which gives rise to a net debt to equity ratio of 56%. The company has said that it has room to take on more debt even now, but that net debt position still looks high to me.
A Foolish conclusion
To sum it up, Keppel Corp is a stock that carries valuation- and balance-sheet-related risks. Do note however, that this study of Keppel Corp’s fundamentals should not be taken as the final word on whether the company would be a good or bad investment going forward. See the information here simply as a good starting point for further research.