What Does Keppel Corporation’s 2nd Quarter Results Tell Us about the Global Economy?

Keppel Corporation Keppel Corp

Keppel Corporation (SGX: BN4) is one of Singapore’s largest conglomerates. It currently has business in multiple industries (real estate, infrastructure, and the building of offshore rigs and vessels, just to name a few) and multiple markets (it has operations in Singapore, the Far East, some ASEAN countries, and the Americas, amongst others).

It has its fingers in so many pies – both operationally and geographically – that its corporate performance might actually give us useful indications of what is going on in the global economy.

Latest report card

Keppel Corporation announced its second quarter results just yesterday. For the first half of 2014, the company recorded year-on-year growth of 5.8% in revenue to S$6.2 billion. Operating margin had expanded due to a milder increase in material and subcontract costs, leading to a 7.6% increase in operating profit to S$882 million.

Unfortunately, bottom-line growth couldn’t quite track operating profit growth as Keppel Corporation’s staff costs increased rather rapidly; the company ended the first half of 2014 with a net profit of S$745 million, up 6% year-on-year.

Keppel Corporation’s annualised return on equity is still a rather impressive 14.2%. But, it should be noted that compared to six months ago, the company’s net gearing ratio had increased from 11% to 22%. That jump had been due to higher capital requirements for its working capital as the company takes up higher value projects. The company is also spending on capital expenditures, which include the expansion of its Keppel Merlimau Cogen plant as well as logistics and data centre activities.

Management’s views

From management’s comments, it seems that the developed world is on track with their recovery and that’s especially so with the United States:

“Thus far, the global economy seems to be navigating through this period of change quite well. The US and European economies appear to be on track in their recoveries, although the former is probably in a stronger position.”

But despite the apparent stability in the global economy, management is still aware of pockets of possible risks that exist:

“The global economy has performed reasonably well and the markets have reacted favourably thus far. Goldilock’s porridge has been served just right by the policy makers – neither too hot nor too cold. That said, considerable risks still exist to derail this happy confluence of market, economy and policies. Tensions in various hotspots such as Ukraine, Syria, Iraq, Iran, and the South China Sea threaten to boil over. We have to make our plans on the basis that the global economy is on a firmer footing for modest growth with policy makers making the right decisions, whilst keeping a watchful eye on what could potentially flare up to change this reasonably favourable outlook.”

These risky areas might all have major impacts on Keppel Corporation’s marine and offshore business, which serves many oil and gas clients operating in these regions. Thus, it would pay for investors to keep a watchful eye on how these risks change.

Marine and Offshore

Management seems optimistic about the company’s prospects in this segment of its business. Capital expenditures within the industry is expected to continue growing along with the global demand for oil and gas. The company still has an order book of more than S$14 billion worth of projects that stretches till 2019.

Infrastructure & Property

The main growth area in this part of Keppel Corporation’s business might be with its subsidiary, Keppel Telecommunication & Transportation (SGX: K11); the latter is involved with providing logistics and data centre services.

As the demand for logistics spaces and data centres are strong, the subsidiary continues to expand in Singapore and China and sees good growth opportunities in these markets.

Keppel Corporation’s property arm is represented by Keppel Land (SGX: K17). The latter had announced its results earlier this week and managed to grow despite the property cooling measures that are put in place in both its key markets, Singapore and China.

Foolish Summary

All told, Keppel Corporation is a nice example of how businesses carry on with life despite the multitude of geopolitical and environmental risks that exist. As for the company itself, it’s still growing at a steady clip for its size, but investors might need to watch out for its gearing ratio and negative free cash flow.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim owns shares in Keppel Corporation.