“Top City Builder in Asia … Your 59% Profit is a Conservative Estimate”

By Travis Johnson, Stock Gumshoe, March 21, 2011

I love love love the stories of swashbucklers and voyages of discovery that pepper the finest investment teaser ads — long lost islands, pirate treasure, ancient mines left fallow since the days of the Pharaohs … now that’s how you pitch an investment idea! If we didn’t all want a little of the romance of the explorer and entrepreneur to rub off on us, well, we’d probably all just buy ETFs, right?

So when I saw the latest ad from Yiannis Mostrous I was pretty sure right away which stock he was teasing, since I owned it years ago, but I still couldn’t resist the story — let’s take a look, shall we?

Here’s how Yiannis gets the juices flowing:

“How a Young Sailor’s Discovery Long Ago … will reward you with serious wealth today.

“From the deck of a 19th century British warship, a twenty-three-year-old midshipman gazes at the coastline of a jungle-covered island. Nearly 180 years later, the consequences of this otherwise obscure event can—with one single trade—put you on course to millionaire status.

“1832. A British warship arrives in the Malay Archipelago to clear out a nest of pirates. Aboard, a bright, ambitious midshipman with a keen eye for geography and opportunity. The pirates are driven out, the vessel sets sail for other waters and other missions. But the young sailor cannot shake this particular island, its azure waters and pristine coves, from his mind.

“The sailor returns to the island many times. And in 1848, now a captain, he makes a key discovery that will change the course of history.”

How can you not keep reading? Heck, I want to go there! The tease is for a newsletter called Global Investment Strategist, which seems to have replaced the more colorfully named Silk Road Investor (more’s the pity — I have enough of a hard time keeping similar-sounding newsletters straight in my head already without them adopting ever more generic names).

And of course, this young midshipman apparently has some connection to the stock that Yiannis is teasing us about:

“… today, the very island that captured the sailor’s imagination happens to be the exact location of my absolute top stock recommendation in the most prime investing region in all of global investing.

“It is, very simply, one of the best-managed companies on the face of planet Earth.

“Indeed, I would go to the extent of stating this is the ONE STOCK I would buy if I were permitted ONLY ONE PICK right now.”

The story of the midshipman, which I won’t recount in all its detail here, is the story of the “discovery” of Tanjong Pagar — and, more importantly, of the sheltered, deep water anchorage there that would allow it to become a key commercial center for the British Empire. Tanjong Pagar is now, it sounds like (I’ve never visited) a trendy “old city” section of Singapore, which is indeed what Mostrous teases as the “Island that Grows Millionaires Like Palm Trees.”

And that anchorage that this midshipman found did become a key harbor, here’s some more of the story from the ad:

“By the 1860s, the harbor bustled with ships. At century’s end, the bustling wharf was renamed in honor of the mariner who’d discovered it.

“The eager young midshipman of long ago (who’d become Sir Admiral of the Fleet) was present for the ceremony.

“Unknown to him, he would later give his name to the company that I believe is the NUMBER ONE investment in the NUMBER ONE investing environment on Earth.”

So that’s our key clue about this company — the ad is essentially a long treatise on the reasons to buy Singapore, and then an argument that this particular stock is the best way to do so. You probably know the basic reasons that many folks tout Singapore (including Jim Rogers, who moved there to be close to the Asia boom a few years ago) — big financial center that some call the “Switzerland of Asia”, pro-business government policies, strong growth, educated population, low crime, etc.

But what we want to know is … which Singaporean stock will make us rich? Right?

Well, some more clues for us:

“Fittingly, my pick proudly carries on the name of the intrepid sailor who dreamt of a thriving Singapore so long ago.

“First, this stellar outfit built a global maritime empire… then expanded into deepsea oil services… then plunged profitably into telecom, city-building and the most stunning real estate development portfolio anywhere in the world today.”

That’s going to sound familiar if you’ve looked at this company before … but we get some more clues, too:

“Today, this company is a global leader in shipbuilding and ship repair. Its Offshore & Marine Division reports revenues averaging about USD 6 billion. The division’s versatility is legendary, having constructed to date over 400 different types of ships, including icebreakers for the Russian oil industry.

“(Note: There’s a lot of oil exploration going on now at the Arctic Circle—so expect the demand for icebreakers to escalate.)

“Working closely with Finnish designers ILS Oy, they successfully delivered their first pair of icebreakers (the first ever to be built in the tropics of Asia) to Russia’s private oil company LUKOIL. These icebreakers can cut through solid ice 1.5 meters thick, and can operate in extreme temperatures as low as -45 C.

“The company also built an extraordinary ice-class floating storage and offloading vessel for use in the Caspian region. This amazing vessel is capable of non-stop service in receiving crude oil from ice-resistant platforms, storing oil on board and, finally, offloading oil to shuttle tankers.”

The company apparently is also a key player in “jumboisation” as shipping companies try to add capacity to their existing vessls, they’re apparently part of a joint venture that is the only source for the world’s largest floating crane (the Asian Hercules II).

But — and this is why I actually owned the shares of this “secret” (for a few more moments) stock several years ago — is that this is the world’s largest builder of deepwater rigs for oil drilling and production….

“Yes, my favorite pick can boast more than being the Number One builder of jack-up rigs. They also have a joint venture in place to fabricate steel parts essential to the operating safety of oil jack-up platforms.

“The Star of Singapore also leads in the manufacture of semi-submersible rigs and other advanced vessels like floating production systems and oil drill ships.

“Business is gushing for this incredibly busy company.

“Recent sales include two harsh-environment jack-ups worth USD $16 million to Discovery Offshore S.A., and two jack-ups to Clearwater Capital Partners for USD 360 million.”

The clues actually get pretty exhaustive if you’re willing to read your way all through the article — which slowly erodes what “secrets” might have been contained in the tease… we learn that this company also offers financial services, develops resorts, and is a leading property developer in Singapore as well as throughout Southeast Asia, and is developing a massive “eco city” in China. Mostrous then tells us that his subscribers have already gotten 59% gains from this stock, but that he thinks it will go up another 98% in the next year and a half … so what is it?

Well, there are a few names that stand out as notable in the early history of British conquest and empire in what became Singapore, including Raffles and Farquhar, but the name that is now attached to that deepwater harbour is Keppel, thanks to Sir Henry Keppel, who did visit the island early in the 19th century as part of the campaigns against the Malay Pirates. I don’t know if he ever looked wistfully into the clear blue waters and envisioned the bustling harbor that would later bear his name, or this particular conglomerate that apparently took his name indirectly (by way of the wharf that was named after him), but the stock that Mostrous is teasing here must be the Singaporean firm Keppel Corp, sometimes called Kepcorp (BN4 on the Singapore exchange, KPELY for the 1:2 ADR on the pink sheets).

Kepcorp is indeed a major shipyard operator and drilling rig builder — which is what came to my attention when I bought shares several years ago, they were supplying the drilling rig boom of the mid-2000s, including selling a lot of rigs to Seadrill, which I owned (and still own — though I sold Kepcorp quite a long time ago). They still get more than half of their revenue from their offshore and marine division, which operates shipyards around the world and did indeed build that ice-class offloading vessel as well as the newest generation of deepwater rigs and drillships, and the floating liquefaction terminals that are being used to build a bigger market for seaborne natural gas, though lots of their revenue comes in from less-sexy shipyard work. The other divisional revenue largely comes from infrastructure, with several power, telecom, water, and wastewater assets, mostly in Singapore but also elsewhere in the region, and from land and property development, some of which has also been offloaded to REITs and other publicly traded entities that Keppel controls.

The company has been somewhat cautious about 2011 expectations, largely because of the state of the global economy and the fact that their growth will have to be driven by high oil prices and by continued growth in Asian economies (and demand for real estate). 2010 was a strong year — much lower revenue thanks to the offshore and marine division (slow year for jack-up rigs in 2010, apparently), but stronger margins for some reason, so substantially higher profit and earnings per share … along with a big boost to the dividend (42 cents/share) and a special dividend of a bonus share for every ten held.

Kepcorp is a big company, though certainly not of “Mega” size — they have 1.6 billion shares outstanding and the stock is now trading at about S$11.60, so that would give them a market cap of roughly S$18.5 billion, which would be about US$14.6 billion. Each ADR (KPELY) represents two shares in Singapore (BN4), so make sure to incorporate that in your calculations as you’re figuring out whether or not Kepcorp interests you. The trailing dividend is right around 3.5% right now, if you ignore that special dividend of a bonus share (they have paid a bonus dividend in many years, though not every year, and the base dividend has consistently grown). The reported earnings for 2010 of 89 cents give them a trailing PE ratio of about 13, which seems reasonable if they’re able to grow as they expect — and they have managed to keep per-share performance numbers quite strong, and their return on equity pretty stable in the low 20% range, though they increased both equity and debt investment in 2010.

It’s also a company that’s very hard to get your arms around — they’re investing pretty heavily in luxury land developments and green energy projects around the world, particularly in the Middle East and in China, but their infrastructure and property revenues so far are still pretty overwhelmingly coming from Singapore itself, and both pale in comparison to the revenue from their offshore and marine division, which means that even though many of their yards are booked well into the future for huge and complex projects like deepwater rigs, they are still very much levered to future demand for new rigs, and the competition for those rigs that raises the rates they can charge.

If you’d like to start digging, Kepcorp does a good job of presenting all their reports and background information on their site — it’s still baffling given the huge number of projects and their partial ownership of some of them, but the info is there, including frequent investor presentations that distill their main points. And do keep in mind the 1:2 nature of the ADRs if you’re researching KPELY … as well, of course, as the exchange rate (a Singapore Dollar is about 79 US cents right now, though that can and does change).

I certainly liked Kepcorp when I owned it, I thought it was well-run and I have a soft spot for complicated conglomerates that get you “one stop” exposure to a bunch of interesting investment themes, which Kepcorp certainly still does. They’ve had a good year, though heavy capital investment and long-term projects mean they aren’t particularly nimble so they did take an unusually large hit during the financial crisis (though they did bounce back pretty quickly). I haven’t scoured the numbers in recent years, and I didn’t start drooling when looking at the current valuation … if you decide to take a look, let us know what you think with a comment below.


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2 Comments on "“Top City Builder in Asia … Your 59% Profit is a Conservative Estimate”"

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Gao
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Gao
March 21, 2011 10:02 pm

Interesting to see a Singapore stock being teased, as I am from Singapore.
A comparable pure play rig builder listed on the Singapore Exchange would be Sembcorp Marine, for those who are interested.
Both have clinched new orders in the past few months. Analysts had predicted that of these two, Keppel has a higher chance of grabbing part of the mega batch of orders from Petrobras.

william
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william
March 24, 2011 4:56 pm

will they have anything to do with the rebuilding of Japan

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