The prolonged low level of oil prices has hit conglomerate Keppel Corporation Limited (SGX: BN4) in more ways than one. One major dark cloud surrounding Keppel Corporation would be the bankruptcy proceedings of one of its major customers, Sete Brasil. Then, there is also the alleged involvement of the company in a Sete Brasil-related bribery scandal (termed “Lava Jato”). In addition, Keppel Corporation’s balance sheet continues to carry a sizeable amount of debt, and the company also recorded impairments in 2016 that are related to its Offshore and Marine segment. In Keppel Corporation’s recent 2016 fourth quarter earnings presentation,…
The prolonged low level of oil prices has hit conglomerate Keppel Corporation Limited (SGX: BN4) in more ways than one.
One major dark cloud surrounding Keppel Corporation would be the bankruptcy proceedings of one of its major customers, Sete Brasil. Then, there is also the alleged involvement of the company in a Sete Brasil-related bribery scandal (termed “Lava Jato”).
In addition, Keppel Corporation’s balance sheet continues to carry a sizeable amount of debt, and the company also recorded impairments in 2016 that are related to its Offshore and Marine segment.
In Keppel Corporation’s recent 2016 fourth quarter earnings presentation, management shed some light on these topics.
On Sete Brasil and Lava Jato
Zvi Skornicki, the former third-party commercial representative for Keppel Corporation in Brazil, alleged that certain managers within the company had authorised the bribes. Keppel Corporation has denied involvement in the scandal.
But in early October last year, the conglomerate said that further investigations revealed that some transactions involving Skornicki may be indeed be suspicious.
In Keppel Corporation’s 2016 third quarter earnings briefing, the company’s chief executive, Loh Chin Hua, said:
“This so called “Lava Jato” investigation in Brazil is quite wide ranging. As we have said in the statement, our internal investigation has been ongoing. As we found some transactions we believe to be suspicious, we have stated that and we have started to look at working with the relevant authorities.”
In the latest earnings briefing, Loh reiterated:
“On the investigations in Brazil, Keppel continues to cooperate with relevant authorities towards resolving issues in relation to contracts with Petrobras and Sete Brasil. Keppel has a zero-tolerance stance against any form of illegal activity, including bribery and corruption, involving its employees or associates.”
As it stands, there are no new updates at the moment.
In the fourth quarter of 2016, Keppel Corporation recorded provisions for an impairment of $336 million. This was related to the rightsizing of Keppel Corporation’s Offshore and Marine segment, as well as impairments to the segment’s investments and work-in-progress.
“The steps that we are taking to rightsize Keppel Offshore & Marine (Keppel O&M) to make it stronger and more efficient for the future necessitates that we take some fairly strong actions in terms of capacity, which then results in this. So a lot of the impairments are related to the right-sizing exercise.”
Chan Hon Chew, Keppel Corporation’s chief financial officer, followed up:
“In the process, we have also reviewed the capacity of the whole network of yards globally. We also reviewed all the fixed assets in the yards and did a comparison between our book costs against net realisable value.
Together with our auditors, we have identified certain fixed assets that we have to make impairment provisions for, which has resulted in the impairments that you see in the financial statement.”
The impairments taken are for the existing inventory of the Offshore and Marine segment’s drill ships and the downward revaluation of its fixed assets and investments.
At the end of 2016, Keppel Corporation had $2.09 billion in cash and equivalents but total borrowings of $9.05 billion. The net debt position triggered questions from analysts around the possible impact of rising interest rates.
“As you know, Keppel Group is in a net borrowing position and of course any increase in Singapore interest rates will result in higher interest expense but that said, a point to note is that we have a prudent mix between fixed and floating. Suffice to say, fixed is more than 50% of the whole portfolio and that will help to mitigate increase in interest rates.”
At the end of 2016, Keppel Corporation had a net gearing of 0.56, down from the 0.57 recorded at the end of September 2016, but up from the 0.53 seen at end-2015.
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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 Chin Hui Leong doesn’t own shares in any companies mentioned.