Keppel Corporation Limited’s Latest Earnings: A Mixed Quarter

The conglomerate Keppel Corporation Limited (SGX: BN4) released its fiscal first-quarter earnings yesterday.

For a brief introduction, Keppel Corp has four main business segments: Offshore and Marine (where the company builds rigs and different types of vessels); Infrastructure; Property; and Investments.

These segments house various subsidiaries like the soon-to-be privatized real estate outfit Keppel Land Ltd (SGX: K17) and the infrastructure-related plays, Keppel Telecom & Transport Ltd (SGX: K11) and Keppel Infrastructure Trust (SGX: LH4U).

The Investments segment sees Keppel Corp owning stakes in other listed companies like the telco M1 Ltd (SGX: B2F) and oil & gas explorer KrisEnergy Holdings Ltd (SGX: SK3).

The numbers

With that, here’s a quick look at the latest financial figures from Keppel Corp:

  1. For the first-quarter (three months ended 31 March 2015), revenue dipped by 6.1% to S$2.81 billion when pitted against the figure of S$3.0 billion seen a year ago. The main contributor to the fall in revenue was the Infrastructure segment, which experienced a 31% decline in sales to S$509 million on the back of “lower prices and volume,” lower revenue from projects nearing completion, and the lack of contribution from certain assets after they were sold. The other segments had all either maintained or grown their revenues.
  2. Consequently, Keppel Corp’s first-quarter profit came in 5.2% lower at S$374 million compared to a year ago. But, a big decline in minority interests stemming from the acquisition of Keppel Land had allowed the profit attributable to Keppel Corp’s shareholders to rise by 6.4% to S$360.2 million compared to S$339 million a year ago.
  3. As a result of the profit increase, Keppel Corp’s earnings per share (EPS) also moved up by 5.9% year-on-year to S$0.198.
  4. Operating cash flow for the first-quarter came in at S$284 million. With capital expenditures of S$364 million, Keppel Corp’s free cash flow stood at –S$80 million. The selfsame figures seen a year ago were –S$336 million (operating cash flow), S$117 million (capital expenditures), and –S$453 million (free cash flow).
  5. As of 31 March 2015, Keppel Corp’s balance sheet carried S$3.89 billion in cash & short-term investments and S$8.14 billion in total borrowings. This is a significant deterioration compared to a year ago when the selfsame figures were at S$5.61 billion and S$7.11 billion respectively. A glance at Keppel Corp’s net gearing ratio would also point to the same conclusion: As of 31 March 2015, the ratio was at 0.37, a big increase from the figure of 0.14 seen in the same quarter a year ago.

Pulling it all together, Keppel Corp had endured a mixed quarter where lower revenue had been greeted with higher profit for shareholders.

In the meantime, the company has managed to improve its cash-flow generating ability, though the deterioration in its balance sheet would be something to keep a close eye on.

Operational highlights and future developments

The Offshore and Marine segment is a very important part of Keppel Corp’s business, so let’s dig into how it fared first. For the quarter, the segment managed to achieve a slight 0.4% year-on-year increase in quarterly revenue to S$1.927 billion; unfortunately, tougher operating conditions had resulted in an 11.9% decline in shareholder’s profit to S$203 million.

In Keppel Corp’s earnings release, Chief Executive Officer Loh Chin Hua painted a difficult picture for the rig-building part of the segment’s business as a result of lower oil prices:

“Across the board, not a single drilling rig order has been placed since the start of this year and rig inquiries have also not been converted into any contracts.”

But, the company’s not sitting still. As Loh also mentioned, Keppel Corp will “continue to leverage [its] proprietary know-how and focus on partnering [its] customers to develop better and more innovative offshore solutions for areas beyond drilling, where demand is expected to remain resilient.”

That being said, the fall in the Offshore and Marine segment’s net orderbook is worth noting. Keppel Corp ended March 2015 with a net orderbook of S$11.3 billion; at end-March 2014 and end-2014, the figures were some S$14.4 billion and S$12.5 billion respectively.

For the Property segment, revenue came in at S$327 million, down very slightly by 0.8% from a year ago. Meanwhile, the segment’s profit for shareholders spiked by 16.8% to S$72.5 million, predominantly due to much lower minority interests.

The biggest development for the segment over the past-quarter is the aforemetioned impending privatisation of Keppel Land. Keppel Corp sees many advantages that can come with full ownership of Keppel Land. To that point, Loh cited the company’s experience after privatising the Offshore and Marine business a decade ago:

“Full ownership of the [Offshore and Marine] Division has enabled us to focus on producing returns, cull synergies from the sum of our parts, as well as further develop core strengths to compete more effectively on a global scale. With the flexibility to assign capital, talents and projects across subsidiaries, we have been able to fully harness our Near Market, Near Customer strategy to capture value worldwide.”

It’d be interesting to see how Keppel Land would grow as a fully-owned unit of Keppel Corp. The company’s vision for Keppel Land is to “develop [it] into a multi-faceted property player, riding on urbanisation trends in Asia. Apart from residential development and trading, Keppel Land is also growing its presence in the commercial sector which continues to do well.”

Moving on to the Infrastructure segment, investors might want to focus on the upcoming merger between Keppel Infrastructure Trust and CitySpring Infrastructure Trust (SGX: A7RU). The merger will result in the creation of Singapore’s largest infrastructure-focused business trust and the combined-entity will be controlling total assets of over S$4 billion.

As mentioned earlier, the Infrastructure segment did not have a good quarter with its 31% decline in revenue. The shrinking top-line also affected the segment’s bottom-line; Keppel Corp shareholders’ share of the segment’s profit had fallen by 29% from S$31.9 million to S$22.7 million.

Rounding off with the Investments segment, it had enjoyed a huge 332% spike in shareholder’s profit from S$14.4 million a year ago to S$62.1 million. Keppel Corp had credited the sale of some investments for the better figures.

A Fool’s take

The Offshore and Marine segment remains Keppel Corp’s most important business but that is unfortunately where conditions are toughest at the moment. The company thinks that it can pull through and to that point, Loh commented in Keppel Corp’s earnings release that he is “confident of [Keppel Corp’s] ability to weather the present uncertainties with discipline and agility.”

Keppel Corp has managed to grow shareholder’s share of the profit this quarter. But investors would have to watch how the top-line evolves. Without higher revenue, profit-growth will eventually stall.

At Keppel Corp’s current share price of S$9.27, it’s carrying a price-to-earnings (PE) ratio of just 8.8 based on its trailing EPS. In addition, shares of the firm are also offering a dividend yield of 5.2% (based on an annual dividend of S$0.48 per share for 2014).

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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 writer Chong Ser Jing doesn't own shares in any company mentioned.