10 Things I Learned From the 2020 Keppel Corporation (SGX: BN4) AGM

Keppel Corporation (SGX: BN4) is a Singaporean conglomerate which has several affiliated business segments that operate in the following industries (each segments’ contribution to the group’s FY2019 revenue in terms of percentage is included in brackets):

• Infrastructure (39%): Energy and environmental infrastructure, logistics, and data centres
• Offshore & Marine (O&M) (29%): Offshore rig design, construction, ship design and repair
• Property (18%): Property development
• Investments (14%): Asset management, master development.

On top of that, Keppel has operations worldwide from the Middle East to North America to Brazil.

However, it usually draws the bulk of its revenue from Singapore, followed by China.

I attended Keppel’s virtual AGM to find out more about how COVID-19 has impacted its operations and about its touted Vision 2030.

So here are 10 things I learned from Keppel’s 2020 AGM.

1. Keppel’s Revenue Increased 27% Year on Year (YoY) to S$7.6 Billion in FY2019

This was due to the increase in revenue in Keppel’s O&M, Infrastructure, and Investments segments. A look at Keppel’s financial statements reveals a new driver for this growth.

In FY2019, Keppel had a new line item ‘Revenue from telecommunication services’ that did not exist in FY2018 and before (highlighted below.)

The injection of this new revenue source was due to Keppel’s 2019 acquisition of M1, a telecommunications firm, via its subsidiary, Konnectivity.

Keppel’s new revenue source contributed to about 40% of Keppel YoY growth in revenue.

In other words, only about 60% of Keppel’s YoY growth in revenue was due to improvements in revenue of its long-standing business segments like O&M, infrastructure, and investments.

2. Keppel’s Net Profit Decreased 25% YoY to S$707 Million in FY2019

This was due to a 45% fall in net profits of Keppel’s Property segment, which comprised 73% of Keppel’s net profits in FY2019.

The fall in net profits of the segment was due to fewer en-bloc sales and divestments.

Keppel will pay out a final dividend of 12 cents per share. Together with its interim dividend of 8 cents per share, Keppel will pay out a total cash dividend of 20 cents per share for FY2019. This represents a dividend yield of 3.2% (based on Keppel’s share price as 8 June 2020).

The dividend is a payout ratio of 51% of Keppel’s net profits — consistent with Keppel’s informal dividend policy of paying out between 40-50% of its net profits for each financial year. According to Keppel CEO Loh Chin Hua, Keppel is unable to give any profit or dividend guidance for FY2020 (most likely due to the economic uncertainties posed by COVID-19).

3. Keppel’s O&M Segment’s Return to Profitability 

Keppel’s O&M segment returned to profitability for the first time since FY2016 with a net profit of S$10 million.

Keppel had been recording losses on its O&M business due to difficult conditions in the O&M industry over the past few years.

However, 2019 showed signs of recovery, with gradual improvements in rig utilisation and day rates. Together with cost management measures and lower impairment charges, Keppel’s O&M segment turned profitable again.

Keppel also won new orders worth S$2 billion in FY2019, up by 18% YoY. Keppel’s orders in the O&M business reflect a pivot away from the oil sector since 2015; in FY2019, over 60% of Keppel’s contract wins were from the gas and offshore renewables sectors.

4. Keppel’s O&M Business Will Face ‘Very Challenging’ Conditions in the Near Future

The Keppel CEO stated that Keppel’s O&M business will face ‘very challenging’ conditions in the near future.

Keppel’s oil-related projects will be deferred due to the following reasons:

1. Sharp fall in oil prices
2. Reduced demand for oil due to COVID-19 lockdowns in various countries and international supply chains disruptions. The market for drilling rigs will remain weak as oil majors reduce exploration spending.

However, as mentioned in the previous point, Keppel O&M has pivoted away from the oil rig business over the past five years to the gas and offshore renewables markets which have gained ‘good traction’.

As at end-March 2020, contracts for gas and renewables solutions made up some 60% of Keppel’s S$4.4 billion net order book.

The CEO also noted that many of Keppel’s businesses are involved in providing essential services, such as ship repair, power plants, data centres, and telecommunications.

Hence, they continue to operate despite COVID-19 and even during the circuit breaker in Singapore.

5. Net Profit From Keppel’s Infrastructure Did Not Grow

Net profit from Keppel’s Infrastructure segment was flat YoY at S$169 million in FY2019 despite an 11% increase in the segment’s revenue.

Keppel Infrastructure Holdings remained a steady contributor to Keppel’s Infrastructure segment, with net profit increasing by 14% to $133 million for FY2019, due to improved performances from its Energy Infrastructure and Environmental Infrastructure business units.

Keppel’s Infrastructure segment is ‘resilient’ in the face of COVID-19, according to the CEO.

The pandemic and work-from-home arrangements have increased the demand for digital connectivity, and Keppel’s data centres have received enquiries from customers across Asia and Europe on new data centre capacities.

In addition, data centres are critical for smart, connected cities, and demand for them is growing. Hence, Keppel’s data centres are poised to ride on the secular growth of the digital transformation of businesses.

In April, Keppel announced that a Keppel-led consortium was awarded a S$1.5 billion contract for Phase 1 of Singapore’s Tuas Nexus Integrated Waste Management Facility.

This marks the third integrated waste management project that Keppel Infrastructure has undertaken.

6. Keppel’ Connectivity Business and M1

While the demand for M1’s post-paid mobile services is resilient.

Roaming and prepaid revenue fell with international travel.

Furthermore, the sale of handsets and ICT-related equipment have slowed.

In my view, despite the headwinds brought about by COVID-19, such as the

• increased usage of 5G connections
• increased spending in the Internet of Things, and the
• work-from-home arrangements accelerating digital transformation in the workplace

It’s actually the growth of cloud computing that will drive demand for data centres greatly in the medium to long-term future.

7. The Impact of COVID-19 on Keppel’s Property Segment Varies Across Countries

In Singapore, home sales slowed due to the closure of showrooms with the circuit breaker.

In China, economic sentiments have partially recovered post-lockdown.

In Q1 2020, out of the 330 homes sold in China, more than 60% were sold in February and March after the COVID-19 outbreak. Home sales in China in April have also been encouraging.

For example, Keppel Land China launched 253 homes for sale at a project in Wuxi in April and almost 90% of the units were sold within a month.

Many Chinese cities like Chengdu, Nanjing, and Wuxi have also seen a return of land sales with land plots transacting at significant premiums, indicating developers’ confidence in the market. In April, Keppel’s 50-50 joint venture master developer in the Sino-Singapore Tianjin Eco-City sold a land plot in the Eco-City at a price comparable to another plot sold in 2019.

In Vietnam, home sales were slower in Q1 2020 as Keppel Land did not launch new projects during the quarter.

Keppel is focused on the Ho Chi Minh City property market in Vietnam. Keppel is optimistic about Vietnam’s property market, which is underpinned by healthy economic growth, rapid urbanisation rate and a growing middle class.

This is especially so in Ho Chi Minh, where Keppel Land is focused on mainly. So far, COVID-19 appears to have had a limited impact on the property market there.

8. Keppel’s Investments Segment Growth

Keppel’s Investments segment netted a revenue of S$1.1 billion, a 173% increase YoY due to its acquisition of M1 in 2019.

M1 made up most of Keppel’s Investments’ revenue in FY2019 as M1’s total revenue grew 4% to S$1.1 billion in FY2019.

Further, although M1 contributed about S$153 million in earnings in FY2019, the Investments segment only made a net profit of S$11 million.

Suffice to say, if not for the M1 acquisition, figures would have been dismal.

Nevertheless, the acquisition of M1 presents opportunities for Keppel in the 5G space. Together with Starhub, M1 won a 5G license in Singapore in April 2020.

Keppel Capital’s net profit grew 19% YoY to S$74 million in FY2019. Its assets under management (AUM) grew 14% YoY to S$33 billion at the end of 2019.

On its target of reaching S$50 billion in AUM by FY2022, Keppel said that it would ‘continue to work towards it’.

9. Keppel’s Asset Management Business Will Be a Key Growth Driver for the Group

Keppel’s asset management business will be a key growth driver for the group. Although fundraising and transactions may take longer-than-usual to finalise due to COVID-19,

The CEO believes that investors are still attracted to Keppel Capital.

They view Keppel Capital as part of a broader Keppel group that develops and operates real assets and has an ecosystem of REITs and business trusts that helps monetise the assets when they mature.

Year to date, funds managed by Keppel Capital has received commitments of US$1.5 billion from investors including a large Asian pension fund and sovereign wealth fund.

Of the US$1.5 billion received, more than half came during April and May, during the circuit breaker period in Singapore.

This possibly reflects investors’ optimism towards the fund’s performance in the future despite gloomy economic sentiments presently.

10. Keppel’s Response to the Business Challenges Posed by COVID-19

Keppel’s CEO shared how the group was responding to the business challenges posed by COVID-19 and its 10-year growth plans.

Keppel has established a COVID-19 task force to stress-test different scenarios on how work can resume safely and how Keppel can emerge stronger after the pandemic.

In 2019, Keppel gathered a team of thirty younger business leaders at Keppel to strategise the company’s long-term transformation in a 10-year roadmap termed Vision 2030.

Under Vision 2030, Keppel will focus on four key growth areas:

1. Energy & Environment (especially on renewables),
2. Urban Development
3. Connectivity Solutions (e.g. green data centres and smart-district development)
4. and Asset Management.

Under Vision 2030, its capital allocation strategy would be driven by four criteria:

1. Whether the targeted business contributes to Keppel’s Return on Equity (ROE) target of 15%,
2. Its scalability,
3. Potential for synergy and integration with Keppel’s other businesses,
4. Alignment with Keppel’s vision and environmental, social, and governance (ESG) goals.

The CEO said that Keppel’s asset management arm will be an ‘important twin’ to fund the various solutions and initiatives taken by the group. It also plans to conduct more merger and acquisition (M&A) transactions to grow, divest selectively and activate landbanks in China and Vietnam to recycle capital and improve returns.

Vision 2030 is part of Keppel’s long-term strategy towards building a more integrated business so that its once-disparate businesses can reap ‘synergies’ by working with one another.

If Vision 2030 succeeds, Keppel will be a ‘powerhouse of solutions for sustainable urbanisation’.

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