Keppel Corporation Limited Unaudited Results for the First Quarter Ended 31 March 2016
1Q 2016 REPORT CARD
1. Net Profit down 41% to S$211 million, compared to 1Q 2015’s S$360 million.
2. Earnings per Share was 11.6 cents, down 41% from 1Q 2015’s 19.8 cents.
3. Annualised Return on Equity of 7.1%.
4. Economic Value Added decreased to S$2 million from S$122 million YoY.
5. Cash outflow of S$306 million.
6. Net gearing was 0.56x.
Address by Mr Loh Chin Hua, Chief Executive Officer, Keppel Corporation
FIRST QUARTER ENDED 31 MARCH 2016
1. Good evening. On behalf of my colleagues on the panel, we welcome you and those online to the conference and webcast on Keppel Corporation’s results and performance in the first quarter of 2016. Joining us on the panel for the first time is Christina Tan, CEO-designate of Keppel Capital, under which we are consolidating our interests in the Group’s fund management arm and the managers of our business trust and REITs.
2. The macro environment remains challenging, with slowing growth in emerging economies. China continues its shift towards slower but more sustainable growth. OECD has also recently warned of growth easing off in several of the major advanced economies.
3. While oil prices have recovered from below US$30 per barrel in January, it continues to hover at around US$40 per barrel. The sustained low oil price environment continues to take a toll on the global oil and gas industry, which is in the midst of one of the most severe downturns in recent years. In the global offshore industry, we are seeing layoffs, mergers as well as large reductions in capital expenditure as the industry prepares for a longer winter.
4. Brazil, which has traditionally been one of Keppel O&M’s key markets, continues to be mired in economic and political challenges, as well as the Lava Jato corruption scandal. Shareholders of Sete Brasil have yet to reach a decision on the future of the company. As I announced at the start of the year, Keppel has stopped construction on Sete Brasil’s rigs since end-2015 and we will not resume construction until payment recommences.
5. Despite the challenges in the oil and gas sector, there continues to be engines of growth, especially in Asia, arising from continuing urbanisation. According to the World Bank, despite the migration of almost 200 million people to its cities in the first decade of the 21st century, Asia’s urbanisation may only be just beginning. This will create demand for high quality homes and offices, clean urban environments, good infrastructure such as WTE plants and data centres, and connectivity. These are areas where Keppel has strong core competencies and where we can seize opportunities for growth.
6. Against the volatile environment, our multi-business strategy continues to keep Keppel in good stead to perform creditably.
7. We achieved a net profit of S$211 million in this quarter, down by 41% over the same period in 2015. The higher contribution from Property at 47% helped to partially offset lower profits from Offshore & Marine.
8. Economic Value Add for the period was S$2 million. On an annualised basis, our Return on Equity was 7.1%.
9. Amidst the headwinds, we are keeping a watchful eye on our gearing and cash flows, exercising financial discipline to maintain an institutional quality balance sheet.
10. Creating high quality assets and then stabilising and monetising them to generate strong cash flow and recurring income are integral to Keppel’s multi-business model. In particular, we want to work the assets in our asset-heavy businesses much harder, and recycle them at the right time to earn the best risk-adjusted returns.
11. To better reflect the contributions of our asset managers under Keppel Capital, we will henceforth report their performance as part of our Investments division.
12. Meanwhile, our share of associate earnings from the REITs and business trust run by the asset managers under Keppel Capital, will continue to be reported under their respective business divisions in Property and Infrastructure. For added clarity, we will distinguish the contributions of these associates to the two divisions in our results presentation. Similarly, for the Offshore & Marine Division, we will provide more detail by highlighting the collective contributions of associate companies such as Floatel International, Seafox and Dyna-Mac, among others.
Growing the Asset Management Business
13. Our asset management business has been a part of the Group for more than a decade. We have grown our assets under management from about S$2 billion in 2006 to some S$26 billion by end of 2015. This translates into a 30% growth compounded annually.
14. The consolidation of our interests in Alpha Investment Partners (Alpha), the Trustee Manager of Keppel Infrastructure Trust and the managers of Keppel REIT and Keppel DC REIT is part of the strategy to sharpen our focus in asset management and grow this business.
15. By bringing together the strengths of our four asset managers, we can create synergies by centralising certain non-regulated support functions, as well as enhance talent recruitment and retention, and the sharing of best practices.
16. More importantly, the creation of Keppel Capital will strengthen the Group’s capital recycling platform, as well as allow us to expand our capital base through the creation of private funds in the real estate, infrastructure and energy spaces. As it creates opportunities for other investors in these areas, Keppel Capital can also serve as a catalyst, pulling through projects for our business verticals.
17. By enlarging the pie with like-minded co-investors, we can give the Group even greater financial capacity to grow, without putting a strain on our balance sheet.
18. Let me now run through the developments in the Group in the first quarter of 2016.
Offshore & Marine
19. Keppel Offshore & Marine continues to focus on executing our projects with our customers well, and delivering them safely, on time and on budget.
20. Just a few weeks ago, we shared the welcome news that Keppel FELS Brasil was awarded a Floating Production Storage and Offloading (FPSO) module fabrication and integration project by its repeat customer MODEC Offshore Production Systems (Singapore) for a contract value of over S$190 million. The vessel is expected to arrive at the shipyard by the first quarter of 2017 for the integration phase. In the past five years, BrasFELS has delivered five FPSO projects safely and ahead of schedule, of which three were for MODEC.
21. Pursuing opportunities in the non-drilling market, Keppel is further honing its capabilities in the LNG business across the value chain. We have jointly secured with the BG Group, now a part of Shell, the licence to supply LNG bunker to vessels in the Port of Singapore. This will enable us to capture pull through work for LNG-fuelled newbuilds, repairs and conversions.
Improving solutions and operations
22. Apart from sharpening capabilities, we are also taking advantage of the downturn to seek new opportunities and expand our services to customers. I am pleased to share that we have obtained the Antitrust approval for our acquisition of the LETOURNEAUTM jackup rig designs, rig kit business, and aftermarket services from Cameron. Expected to be completed in 2Q 2016, the acquisition of LETOURNEAUTM will broaden our offerings to customers, allowing us to better support them with end-to-end jackup rig solutions.
23. Meanwhile, to ride out the current turbulence, we will continue to stay close to our customers, and focus on execution whilst rightsizing the organisation so that we can remain profitable even with a lower top line.
24. Since the start of 2016, our global workforce has been further reduced by 9.4% or about 2,800 headcount, of which 2,300 are from overseas yards, while 500 are from those in Singapore.
25. Apart from optimising our resources across our yards, we are also committed to managing our overheads effectively. Keppel Offshore and Marine had cut its overheads by 10% last year compared to 2014. In this first quarter, we have further reduced overheads by another 28% compared to the first quarter of 2015, enabling us to achieve a healthy operating margin of 13.6% despite lower revenue.
26. Last month, Keppel FELS delivered two jackup rigs to our customer Grupo R, both of which have secured charters from PEMEX, Mexico’s national oil company. Built to our proprietary KFELS B Class design, CANTARELL I and CANTARELL II, are part of a series of five jackup rigs that Keppel FELS is building for Grupo R.
27. In total, we have delivered three drilling jackups in 1Q 2016, including one unit to Gulf Drilling International at the start of the year. During the quarter, we have also delivered a liftboat and a Transformer platform.
28. Last month, a naming ceremony was held by Keppel FELS for the accommodation semi “Floatel Triumph” which will be chartered by INPEX Operations Australia for work in the Ichthys Field, off Western Australia. Last week, a naming ceremony was held by Keppel Singmarine for a high-specification deepwater derrick lay vessel built for Hydro Marine Services, a subsidiary of McDermott International. These are among the key projects we expect to complete in 2016, which include a number of jackups, a semisubmersible, a land rig and several conversion projects for floating production and storage solutions.
29. During these challenging times, we are working closely with our customers for win-win outcomes wherever possible. Earlier this year, Transocean and Ensco have announced the deferment of their projects. Deliveries of two other jackups, for Clearwater and BOT Lease Co, have also been deferred to next year, while deliveries of two semis are deferred from 2017 to 2019/2020. The contracts are still valid, and we are working towards delivering them based on the new schedules agreed upon with our customers.
30. We do not need to make provisions for any of these contracts currently. However, we are monitoring the situation carefully and are focused on executing our projects well.
31. At the Extraordinary General Meeting of Keppel Land held last week, the participating shareholders have given their approval for the proposed Selective Capital Reduction, which will result in the cancellation of 0.73% of the total issued share capital in the company.
32. Keppel Land has proceeded to seek the approval and confirmation by the Court of the Selective Capital Reduction. At the completion of this exercise, Keppel Corporation will own 100% of Keppel Land.
33. In the first three months of 2016, our Property Division sold about 940 homes, mostly in China. This is higher than the 720 homes sold in the same quarter last year.
34. Despite tightening measures in the first-tier cities in China, we continue to experience positive demand for our premier developments in Shanghai, Chengdu, Tianjin and Wuxi.
35. Keppel Land continues its focus on strengthening its presence in its core markets and growth cities, as well as recycling assets for higher returns.
36. As one of the largest and pioneer foreign real estate investors in Vietnam, Keppel Land has been privileged to play a part in Vietnam’s urbanisation over the years. The recent relaxation of the Housing Law and Real Estate Business Law, improvements in public infrastructure, growing middle class as well as high urbanisation rate continue to drive the demand for quality homes and investment-grade offices in Vietnam.
37. Seizing more opportunities in Vietnam, Keppel Land took a 40% interest in a joint venture to develop a prime 14.6-hectare waterfront site in the Thu Thiem New Urban Area, which is poised to become Ho Chi Minh City’s future central business district. The planned development will comprise premium residential apartments, office and retail properties as well as an 86-storey integrated mixed-use tower complex. We are excited that through this project, we will bring the best in waterfront and urban lifestyles to Ho Chi Minh City as well as augment Keppel Land’s quality portfolio of prime residential and commercial properties in the city.
38. Separately, Keppel Land has also entered into a subscription agreement with Nam Long Investment Corporation, a leading affordable housing developer in Ho Chi Minh City, for the subscription of VND 500 billion (approximately S$30.4 million) convertible bonds due in 2020. This is in addition to the approximately 5% stake Keppel Land has in the company. The investment underscores our confidence in the long-term investment potential of Vietnam, which is one of Keppel Land’s key growth markets.
39. In Singapore, Keppel Land has expanded its commercial portfolio with 112 Katong in which it has recently acquired a 22.4% interest. Here is a good example of the collaboration and synergy in the Group where the different businesses in our property vertical work together to extract value from various aspects of asset ownership, management and operations. The remainder interest in 112 Katong is held by the Alpha Asia Macro Trends Fund, a fund managed by Alpha Investment Partners while Keppel Land Retail Management has been appointed the retail manager.
40. Reflecting the group’s capital recycling strategy, over the first quarter, Keppel Land has also announced divestments of two properties in Hanoi, its stakes in a Thai-listed company as well as a property developing company in Sri Lanka.
41. Keppel REIT has also successfully completed the divestment of its 100% interest in office development 77 King Street in Sydney, Australia, for A$160 million. The sale of the property is approximately 40% above its original purchase price and an approximate 27% premium over its latest valuation.
42. Tapping on demand in recovering property markets across Asia, Keppel Land has about 20,000 homes in its portfolio ready for launch over the next two years, mostly in China.
43. In parallel, Keppel Land is actively strengthening its portfolio of commercial properties which has increased to over one million square metres of gross floor area.
Energy Infrastructure & Services
44. On to our Infrastructure Division.
45. Our team is pursuing growth opportunities in key areas such as gas-to-power and waste-to-energy both in Singapore and overseas. They are focused on building Keppel Infrastructure into a stable contributor to the Group’s bottom line.
46. In Qatar, Keppel Seghers has begun the 10-year operations and maintenance phase of the contract for the liquids stream, solids thickening and dewatering facilities in the Doha North Sewage Treatment Works.
47. Meanwhile, we continue to work at generating predictable and sustainable cash flows for Keppel Infrastructure Trust. Just last week, together with joint venture partner, Shimizu Corporation, Keppel Infrastructure Trust handed over the newly completed 1-Net North Data Centre to their client. The lease agreement is effective for a period of 20 years.
48. Under our data centre business, Keppel Data Centres Holding, a joint venture between Keppel T&T and Keppel Land, continues to display strong capabilities by securing $84.5 million in contracts to provide colocation and data centre services at Keppel Datahub 2.
49. The contracts were signed with a blue-chip client in the internet enterprise industry and a government-related entity, bringing commitment at Keppel Datahub 2 to 100% within two years since the facility was completed in 2014. Built to energy-efficient specifications, the facility was the first newbuild data centre in Singapore to be awarded the BCA-IDA Green Mark Platinum Award for New Data Centres.
50. Keppel Data Centres also recently expanded its data centre footprint with the ground breaking of Keppel Datahub 3, its fourth data centre in Singapore. Once completed, it will feature approximately 183,000 sq ft of gross floor area, making it Keppel’s second largest data centre in Singapore after Keppel Digihub.
51. Just this morning, Keppel Data Centres announced that it has entered into a long-term collaboration agreement with Hong Kong’s PCCW Global to co-develop and market an international carrier exchange, which offers connectivity-related managed services to facilitate interconnects. The collaboration leverages PCCW Global’s extensive global network connectivity and marks the expansion of Keppel T&T’s data centre footprint into Hong Kong.
52. Expanding its value-added services to customers, Keppel Data Centres had also signed a Memorandum of Understanding with the National Supercomputing Centre to explore potential collaboration in areas of supercomputing and high performance computing, InfiniBand connectivity, networking and scientific software applications, green technology for data centres and related areas.
53. In the first three months of 2016, Keppel T&T secured additional clients for its logistics facilities in Singapore and Vietnam. In China, the new distribution centre in Tianjin and the Lu’an logistics park are expected to commence operations later this year.
54. Our Investments Division is Keppel’s fourth business vertical. It used to comprise mainly the Group’s holdings in associate companies k1 Ventures, M1 and KrisEnergy. As of this quarter, we have also included contributions from the four asset managers under Keppel Capital.
55. Profit from the Investments Division was impacted in 1Q 2016 due mainly to the absence of gains from the sale of investments last year, which amounted to S$50 million, as well as taking in our share of losses from KrisEnergy. However, the recurring earnings from our asset management business has been steady, contributing S$15 million in 1Q 2016, vis-à-vis S$13 million in the same period last year.
56. During the year, the Alpha Asia Macro Trends Fund II managed by Alpha Investment Partners has acquired the remaining 50% stake in the 78 Shenton Way office building as well as a Grade A office building, Jongro Place in Seoul’s CBD. We also expect to launch the Alpha Asia Macro Trends Fund III this year.
57. I have shared our plans to grow Keppel’s asset management business, and develop our Investments Division into a steady pillar of recurring income for the Group. Presenting our asset managers’ performance in this manner will enable us to better demonstrate and account for the future growth of this business.
58. Finally, I am pleased to update that we have made good progress on the formation of Keppel Capital. Since the announcement in January this year, we have installed an experienced and capable team of professionals at Keppel Capital, and are on track with the restructuring of our asset management business, which will be completed by 2H 2016.
59. I shall now let our CFO, Hon Chew, take you through a review of the Group’s financial performance.
60. Thank you.
Source: Keppel Corporation Limited