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Investor CentralKeppel Corporation Limited - MANAGEMENT REPLY: What went wrong at the Doha and Manchester infrastructure projects?
While they make up a small part of Keppel’s total earnings, the CEO acknowledged they are not in keeping with Keppel’s reputation. The company responds in-depth.
10/2/2014 – Keppel Corporation has reported declines in Q4 revenue, profit and cash flow, but analysts have are hardly turned negative on the stock.
The company has a record-high order book of S$14.2 bln to be delivered over five years, which means it has earnings visibility until 2019.
But its stock price has fallen over the past six months, even as it raised its dividend to 30 cents for FY13 from 27 cents a year ago.
Keppel said it is keenly aware of the tightening competition especially in the offshore & marine services business, but the current positive global outlook on exploration and production should support growth.
New CEO, Mr Loh Chin Hua concedes existing EPC project challenges in the United Kingdom and Qatar.
The operations are "not in keeping with the Group's enviable record for quality project execution" and "lessons have been learnt", and that the focus is to complete the projects and minimise losses.
Keppel Infrastructure in an October 17, 2013 Q&A session after its Q3FY13 results, said it faces labour and productivity issues over the Runcorn II project in Manchester, and is edging closer to completion for its Doha North Sewage Treatment Works in the Qatari capital.
Even so, the company is already exploring a data centre business trust as it moves to expand its data centre business.
Mr Loh said Keppel will continue its focus on its multi-business strategy comprising offshore & marine services, infrastructure and property, and there will as well be more energies channelled to research and development.
These are the company's earnings for Q4FY13:
Revenue: -11.3% to S$12.38 bln
Profit: -13% to S$2.4 bln
Cash flow from operations: S$624.7 mln vs S$1.01 bln
Dividend: 30 cents per share vs 27 cents per share
Order book: S$21.9 bln over 5 years
Manpower costs rose from S$1.58 bln in 2012 to S$1.67 bln.
Offshore & Marine and Property business units manpower costs went up, partially offset by manpower costs for the Infrastructure business unit.
Profit also dropped 13%, despite higher share of profits from associate companies at S$625.9 mln, up from S$602.5 mln.
This is because of lower bank deposits made in the course of 2013, and the deconsolidation of Keppel REIT with effect from August 31, 2013.
Interest income from bank deposits dropped from S$160.8 mln in 2012 to S$144.2 mln.
Cash flow was lower at S$624.7 mln from S$1.01 bln in 2012 because of higher operational activities in that year.
The company has cash reserves of S$5.56 bln, up from S$4.06 bln in 2012.
But Keppel also has S$7.1 bln in debt, of which S$517.1 mln is payable within a year or less.
Keppel Corporation has mortgaged certain properties and assets of up to an aggregate amount of S$3.1 bln.
Its total assets rose 2.9% to S$30.06 bln as at December 31, 2013, due to an increase in fixed assets through capital expenditure for the expansion of Keppel Merlimau Cogen power plant, acquisition of an industrial building by Keppel's infrastructure business, and other operational capital expenditure.
Total liabilities were at S$16.37 bln as at December 31, 2013, up from S$15.63 bln in 2012, a result of the deconsolidation of Keppel REIT, partially offset by bank borrowings, operational capital expenditure and acquisitions.
Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.
Bullish analyst report
OCBC Research said while core earnings were "disappointing", the company's offshore & marine business is still looking up even as competition was picking up.
Without exceptional gains, core earnings would have fallen to S$1.41 bln, 7% below expectations.
Coming over the mark as well was the full-year revenue figure of S$12.38 bln, much higher than the S$11.83 bln expected.
Full-year revenue slipped 11% because of a 41% fall in the company's property sales.
The year-ago numbers were boosted by revenue from the sale of Reflections at Keppel Bay units.
Net profit dipped 18% because of a "larger-than-expected" loss in the infrastructure business "mainly due to prolonged provisions".
OCBC maintains a BUY call with a fair value of S$12.25.
Maybank Kim Eng Securities Research said Keppel was "staying the course".
Its stable operating margin reflected the company's ability to execute its business profitably.
It also said offshore and marine order win prospects "remain rosy" with enquiries from "customers across all product types".
Keppel's "Near Market, Near Customer" strategy, by developing its presence in Brazil, Mexico and the Middle East, was paying off.
Maybank says key growth catalysts for 2014 are: (i) the confirmation of Golar's FLNG conversion project (potentially worth US$800 mln, with options for two additional units, and (ii) a six-rig contract upon finalisation of the Mexican yard JV with Pemex.
Maybank Kim Eng Securities Research maintains a BUY call with a price target of S$12.48.
Macquarie Equities Research said Keppel concluded FY13 with a "powerful arsenal" where the positives to look forward to are a Korean order for a new drillship, the partnership with Pemex in Mexico, a new power plant in Singapore, and more residential sales in China.
Macquarie was happy with the Q4 EBIT margin of 14.2%, and a strong full-year margin of 14.9%.
The 30 cent final dividend also made for a robust yield of 4.5% including in specie dividends.
S$6.9 bln worth of orders in 2013 for 19 jackup rigs and 1 semi-submersible exceeds forecasts for S$5 bln worth of orders.
In total, the S$14.2 bln order book for 28 jackup rigs, 3 accommodation semi-submersibles, and 7 semi-submersibles is at an all-time peak.
The infrastructure business grew 22% YoY thanks to the new co-gen plant in Singapore.
However, Keppel lost S$111 mln in the infrastructure business from projects in Doha and Manchester.
Macquarie Equity Research has an OUTPERFORM call with a price target of S$13.00, up from S$10.62.
PhillipCapital Securities Research said earnings were in line with estimates.
The offshore & marine services margin was "respectable" above 14%.
On the infrastructure business, the first phase of Runcorn II is "substantially completed" and will be going through commissioning, while the Doha North Sewage Treatment Works project is "ready for final commissioning" before the targeted handover later in the 2014.
Phillip Securities lowered its estimates on the infrastructure business and raised its 2014 order win forecast from S$6 bln to S$7 bln.
Philip Securities maintains an ACCUMULATE call with a price target of S$12.34.
Bearish analyst report
We have not come across any bearish reports.
Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.
1. What were the specific labour issues for Runcorn II that were encountered?
Was it the locals or the foreigner workers who were giving trouble?
It is rather interesting to learn of "productivity issues" in the United Kingdom.
Could we have a clearer picture of the situation that has after all dragged down profit by S$111 mln.
2. What really motivated this behaviour?
Was it an issue in development that was overlooked?
Some manpower troubles can be avoided if they are detected and resolved on the outset.
3. What were the specific problems with the Doha North Sewage Treatment Works?
Water-technology.net has this useful backgrounder on the contract, but also doesn't shed light on what went wrong.
What part of the project needed attention?
4. What were the solutions to both projects in the end?
Management Reply:
(Total number of questions in the full story: 8)
We thank management for its responses.
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