Singapore is the premier oil hub in Asia as well as one of the world’s top three oil refining centres, with many major oil companies such as Shell, Exxon Mobil and Chevron Philips having a presence here.
Correspondingly, there are many companies involved in the offshore and marine industry, delivering goods and providing support services to the big boys mentioned above along different stages of the oil and gas value chain. Keppel Corporation is arguably the most prominent service provider among these companies. Not just a household name locally, it is a global leader in the offshore rigs building industry.
Listed on the Singapore Exchange, here are 4 key things you need to know about Keppel Corporation Limited (SGX:BN4)([stock_quote symbol=”SGX:BN4″ show=”name” nolink=”1″ class=”1″]).
Ticker Symbol: SGX:BN4
Market Capitalisation: S$ 11.3 billion
Sector: Industrial Conglomerate
Keppel Corporation is often viewed as an offshore marine company with strong market leadership in rig building, particularly for jack-ups and semi-submersibles. However, it is a conglomerate with diverse operations across different industries: Offshore and Marine, Property, Infrastructure and Investments. Its key competitor in the offshore and marine sector is also Singapore-listed Sembcorp Marine Limited (SGX:S51)([stock_quote symbol=”SGX:S51″ show=”name” nolink=”1″ class=”1″]), part of SembCorp Industrial Limited (SGX:U96)([stock_quote symbol=”SGX:U96″ show=”name” nolink=”1″ class=”1″]).
Offshore and Marine
The work scope here covers design, construction, repair and upgrading of offshore rigs, ship conversion and repair, and specialised shipbuilding. This division is the largest revenue contributor in FY2016, taking up 42.2% ($2.85b) of the total revenue ($6.76b). However, it contributed only a minuscule 3.7% ($29m) out of the total net profit ($784m). This division has performed poorly in 2016, with a 54.3% and 94% drop in revenue and net profit respectively. This is mainly due to the subdued capital expenditure by oil exploration companies caused by the persistently low oil price environment currently.
This division focuses on property development and investments, and a 45% ownership in Keppel REIT (SGX:K71U)([stock_quote symbol=”SGX:K71U” show=”name” nolink=”1″ class=”1″]), a commercial REIT listed in Singapore. It constituted 30% ($2.03b) of the total revenue and an outsized 79% ($620m) of the total profit. In FY2016, its revenue increased by 11.6% while net profit dropped by 6.2% over the previous financial year.
This division covers the energy and environmental infrastructures such as Waste to Energy Plant and municipal waste collection services, logistics, and data centres. It contributed 25.8% ($1.74b) and 12.6% ($99m) of the total revenue and net profit in FY2016. But its revenue and profit from this segment retreated by 14.4% and 49.7% respectively over previous financial year.
This division comprises Keppel’s investment in mainly 3 asset classes: REITs such as Keppel and Keppel DC (SGX:AJBU), publicly traded equities such as Kris Energy and M1 Ltd (SGX: B2F), and private equity and real estate funds. Its share of FY16 revenue and net profit is 2% and 4% respectively, with a 31.3% and 80.5% drop from FY16.
Leader in Key Competency Area
Keppel started off as a shipyard in 1968 and branched into different aspects of offshore and marine industries over the years. It has grown into a global leader in rig design, construction and repair, ship repair and conversion, and specialised shipbuilding industries, with 20 facilities globally catering to customers’ demands. With its rich experience and deep technical expertise, Keppel commands a strong moat in its market and will stand to benefit when the oil and gas industry recovers in future.
Diversified Operations and Multi Business Strategy
Keppel’s business divisions, while each seemingly unrelated, are synergistic in nature. The management had articulated its emphasis on synergy and collaboration across its business units in FY16 Annual Report. For example, property and real estate assets developed under the Property Division can be recycled to one of the funds under Investments Division when they stabilise. Keppel is also seeking growth opportunities in sustainable urbanisation, by providing solutions across its property development, environmental infrastructure and data centre management businesses.
Earnings Upside from Divestments
Keppel holds significant investments in various companies, some of which operate in a challenging industry currently. One such example is M1. Keppel could consider divesting some of these holdings, freeing up cash to redeploy to more promising industries or to pare down its debts. This could also help reduce the ‘conglomerate discount’ associated with the valuation of Keppel Corporation, and bolster its market valuation.
4 – Threats/Weaknesses
Prolonged Depressed Oil Prices
Oil price is a key determinant of Keppel’s jackups and submersible rigs order book, which will impact future revenue. Although oil price has risen substantially from the low of $30 per barrel in early 2016 to the current level of $42 per barrel, it has actually been weak recently if compared to 2017 high price of $54. A low oil price will affect capital expenditure of oil exploration companies, resulting in lower rig orders received by Keppel. Some companies with existing orders may also ask for deferment of rigs delivery, resulting in delayed revenue recognition. All these will impact Keppel’s top line given that the Offshore and Marine Division is still the largest revenue generator.
Keppel had taken decisive measures to streamline its offshore and marine operations, reduce costs and explore alternative products for the oil and gas industry. These include reducing its direct workforce, lowering subcontract headcount, cutting yard capacity, closing down under-utilised yards and forming joint ventures in the growing Liquified Natural Gas market. While these efforts could bring about cost savings, the critical earnings factor still rest on oil price which directly impacts Keppel’s revenue.
China and Korea Shipyards’ Competition
While Singapore’s rig builders, Keppel Corporation and Sembcorp Marine are global leaders in the industry, other players are muscling themselves into the market to challenge Keppel’s leadership position. Korea’s major shipyards, Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering have entered the jackup rigs market, the traditional area of expertise of Keppel. China shipyards such as China Rongsheng Heavy Industries have also secured orders for jackup rigs.
While the whole industry is facing major headwinds caused by low oil prices, competition posed by other companies cannot be under-estimated as they are often state-owned enterprises with deep pockets and can rely on government financing to tide them over the difficult period. Some of the shipyards may also compete on price, undercutting Keppel offering to gain new customers.
Keppel Corp is currently trading at a Price to Earnings ratio of 14.4 and a dividend yield of 3.2%.
Keppel Corp’s largest shareholder is Temasek Holdings who owns 20.49% of the total shares.
Keppel Corporation’s latest financial reports can be found in the link here.
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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in CS Chong’s personal capacity. It does not in any way represent those of his employer and other related entities. CS Chong does not own any companies mentioned.