Keppel Corporation Limited (SGX: BN4) has had its share of troubles lately. The saga with its major customer, Sete Brasil, looks set to drag on. Meanwhile, Keppel Corporation also cut its dividend last year, casting doubt on the sustainability of its dividend in the future. A recent webcast shed some light on these topics. Here’re a couple of snippets I picked out that may interest investors: On Sete Brasil In the previous quarter, Keppel Corporation said that it had received US$1.3…
Keppel Corporation Limited (SGX: BN4) has had its share of troubles lately.
The saga with its major customer, Sete Brasil , looks set to drag on. Meanwhile, Keppel Corporation also cut its dividend last year, casting doubt on the sustainability of its dividend in the future. A recent webcast shed some light on these topics. Here’re a couple of snippets I picked out that may interest investors:
On Sete Brasil
In the previous quarter, Keppel Corporation said that it had received US$1.3 billion thus far from Sete Brasil and had stopped all work at the end of 2015. Keppel Corporation also said that a S$230 million provision has been taken in last year’s fourth-quarter earnings.
Loh Chin Hua, Chief Executive Officer for Keppel Corporation, provided an update around the issue in his opening address:
“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.”
“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.”
As a note, Loh’s address was done on 18 April 2016, three days before Sete Brasil announced that it would file for bankruptcy protection. On the 26 April 2016, Keppel Corporation gave a short update. The conglomerate reiterated that its original provision of S$230 million is sufficient. Loh also said that Keppel Corporation will not be revealing the payments outstanding from Sete Brasil.
If anything, the situation is becoming more complex with Brazil’s political climate and the bankruptcy filing at Sete Brasil. This matter could drag on for a while, to say the least.
Last year, Keppel Corporation’s dividend was reduced by almost a third. When questioned on the sustainability of the dividends, Loh added the following remarks:
“The dividend payout will definitely be dependent on the profits, free cash flow as you have alluded to, as well as to the outlook. I think our goal is always to share as a Group. When we do well, we do share the fruits of that with our shareholders. But at the same time, we want to make sure that dividends that are paid are sustainable.”
Chan Hon Chew, Keppel Corporation’s Chief Financial Officer, also added his thoughts around the dividend payout:
“As to dividends, I just want to add that we do not have an explicit dividend policy. But as Chin Hua has alluded to, when we make decisions on dividends, we have to make sure that we look at our balance sheet, our cash flow requirements and make that decision, together with the Board when we look at the financial year-end results.”
The balance sheet is a source of concern. Keppel Corp’s net debt (total borrowings minus cash and equivalents) stood at S$6.8 billion, as of 31 March 2016. Chan added his comments on this:
“Just to add that at this point in time, our gearing at 56%. We still have quite good head room although we do not have a gearing target, but it suffices to say that we want to maintain an institutional quality balance sheet which means we do not expect our gearing to exceed 100%.”
Notably, Keppel Corporation also reported negative free cash flow in the previous quarter. Foolish investors might want to keep monitoring Keppel Corporation’s balance sheet and free cash flow in the coming quarters for clues on its future dividends.
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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 Chin Hui Leong doesn't own shares in any company mentioned.