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Keppel Corporation Limited’s Latest Earnings: What’s Next After A Huge Drop In Earnings?

Keppel Corporation Limited (SGX: BN4) just released its second-quarter earnings yesterday evening for the three months ended 30 June 2016.

As a brief introduction, Keppel Corp is a bona-fide conglomerate. It has four main business divisions: Offshore & Marine, Property, Infrastructure, and Investments.

With that, let’s take a closer look at the company’s earnings release to better understand how it has fared.

Financial highlights

Here are some of Keppel Corp’s latest financial numbers:

  • Revenue for the reporting quarter had slumped by 36.6% from S$2.56 billion a year ago to S$1.63 billion.
  • Net profit attributable to shareholders came in at S$205.8 million, which is 48.1% lower compared to the second-quarter of 2015.
  • As a result, Keppel Corp’s diluted earnings per share tanked by 48.4% from S$0.217 a year ago to S$0.112.
  • While there was a sharp drop in profit, the cash flow picture looked better. Keppel Corp’s operating cash flow was a negative S$7.2 million in the reporting quarter, a sharp jump from the negative S$555.9 million seen a year ago.
  • Keppel Corp’s net debt (total borrowings minus bank balances, deposits & cash) is currently at S$7.33 billion, giving rise to a net gearing ratio (net debt divided by equity) of 0.62. Both represent a sharp jump from end-June 2015; the self-same figures back then were S$5.05 billion and 0.42.
  • Keppel Corp has announced an interim dividend of S$0.08 per share. This is 33% lower than the interim dividend of S$0.12 per share in the previous year.

Business highlights

The following’s a breakdown of Keppel Corp’s revenue by business division:

Keppel Corp Q2 2016 revenue segment table
Source: Keppel Corp’s earnings release

As you can see, a big driver of Keppel Corp’s overall revenue decline had been the 54% fall in the Offshore & Marine division’s revenue during the quarter. The division had suffered because of lower volume of work, deferment of some projects, and the suspension of Sete Brasil drillship contracts.

Sete Brasil, if some of you may recall, is a big customer of Keppel Corp that filed for bankruptcy protection earlier in the year partly as a result of the collapse in the price of oil since 2014.

Because of the bankruptcy filing, Keppel Corp has excluded Sete Brasil’s projects from its order book. Keppel Corp currently has a net order book of S$4.3 billion (Sete Brasil’s projects would have added S$4 billion to the net order book), a sharp decline from the S$11.0 billion seen in the second-quarter of 2015.

Keppel Corp’s Property division was the only one that saw revenue growth. It had benefitted from continuing urbanisation trends and strong demand for homes in China. The real estate business sold 2,140 homes in the first-half of 2016 (1,850 in China, 90 in Vietnam, and 190 in Singapore), 17.6% higher than the 1,820 seen in the first-half of 2015.

Future prospects

Keppel Corp commented in its earnings release that the Offshore & Marine division has managed to secure S$0.5 billion in new orders to-date (this compares with S$1.5 billion new orders to-date in the second-quarter earnings release). The company added:

“Faced with the global sector downturn, the Division is rightsizing its operations for what could be an extended slowdown, while pursuing opportunities in niche markets and in non-drilling areas. It will continue to build new capabilities and position itself to seize opportunities for the upturn.”

On the Property Division’s outlook, the management had this to say:

“The Division will remain focused on strengthening its presence in its core and growth markets seeking opportunities to unlock value and recycle capital.”

Coming to the Infrastructure business, Keppel Corp expects the electricity market “to remain competitive” but added that the division’s “integrated power and gas business platform will enable it to weather the challenges ahead through driving synergies and value creation across its diversified portfolio.”

The Singapore-listed company Keppel Telecommunications & Transportation Ltd (SGX: K11) belongs to Keppel Corp’s Infrastructure division. Keppel Corp said that Keppel T&T “will continue to develop both logistics and data centre businesses locally and overseas. It will also focus on growing a portfolio of quality data centre assets for injection into Keppel DC REIT (SGX: AJBU).”

Earlier this month, Keppel Corp had completed the consolidation of its asset management business into Keppel Capital. In the earnings release, management had shed some light on Keppel Capital and what its formation means for Keppel Corp:

“In the Investments Division, the formation of Keppel Capital will allow the Group to more effectively recycle capital and expand its capital base with co-investments, giving the Group greater capacity to seize opportunities for growth without putting a strain on the balance sheet.

Keppel Capital will create value for investors and grow the Group’s asset management business. Total assets under management by Keppel Capital are about $26 billion as at 30 June 2016.”

Keppel Corp’s shares closed at a price of S$5.58 yesterday night. That gives the firm a trailing price-to-earnings ratio of 8.5.

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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 Esjay owns shares in Keppel Corporation.