Keppel's Q2 profit falls 48.1 per cent to S$205.8m

The winter in the oil & marine (O&M) sector may be harsh but it will not last forever, Keppel Corporation said on Thursday as it posted a 48.1 per cent fall in net profit to S$205.8 million for the second quarter.

The three months ended June 30 have been tough, said Keppel, but the group's multi-business strategy continues to support its performance amid the challenging environment.

A silver lining is the resilient trend of urbanisation in Asia, buoyed by a growing middle class and continuing rural-urban migration, Keppel Corp's chief executive Loh Chin Hua said at the results briefing. "Whether it is meeting the need for energy, green homes and office buildings, or high-quality infrastructure such as power plants, waste-to-energy plants and data centres, the Keppel Group is well placed to seize growth opportunities by providing solutions for sustainable urbanisation," said Mr Loh.

The Q2 earnings brought first-half earnings to S$416.3 million, a fall of 45 per cent. Reflecting its role as a stabiliser in the group's performance, recurring income contributed S$178 million, or 43 per cent, to the group's H1 earnings. Earnings per share for Q2 were 11.3 Singapore cents, down from 21.9 Singapore cents a year ago.

Second-quarter revenue was down 37 per cent at S$1.63 million.

Revenue from O&M fell 54 per cent to S$720 million followed by a 25 per cent fall from infrastructure to S$404 million and an 11 per cent drop from investments to S$32 million. This was partly cushioned by a 16 per cent increase in revenue from the property division to S$469 million on stronger home sales in the first half. For the first half, group revenue dropped 37.4 per cent to S$3.37 billion.

The group's property division has already surpassed the O&M division as the largest contributor to net profit since the privatisation of Keppel Land in FY15. For Q2 FY16, property continued its strong showing by contributing S$94 million, or 46 per cent, to net profit compared with S$61 million, or 30 per cent, from O&M.

About 86 per cent of Keppel Land's home sales were in China, especially Chengdu, Wuxi and Tianjin. Mr Loh flagged rising land prices as reflecting improved home sales in Tianjin. Two plots of residential land auctioned from its Sino-Singapore Tianjin Eco-city joint venture project were sold at record prices of around 8,000 yuan (S$1,625) per square metre of GFA (gross floor area), more than three times the price of similar land parcels sold earlier this year in the Eco-City.

Keppel O&M, once the group's largest top- and bottomline contributor, has been right-sizing its operations in preparation for a long and harsh winter resulting from a drastic decline in its erstwhile thriving rig-building business. Although oil price has rebounded from below US$30 to US$47, Keppel is not expecting demand for drilling rigs to return soon against the background of an over-supplied rig market and falling rig operating day rates.

For the first half of 2016, Keppel O&M reduced its overall direct staff strength by 16 per cent, or 4,900, of which less than a quarter was from Singapore. Subcontract headcount in Singapore was further reduced by another 670 persons. This brings the total attrition to about 11,000 from its global direct workforce and about 8,600 from its subcontract workforce in Singapore. Keppel O&M is also looking to integrate its engineering resources across the different units and if necessary, to mothball yards with low work volumes, as a result of slowing rig-building activity.

Keppel O&M's chief executive Chow Yew Yuen said the division has received requests from two clients, Grupo R and Parden Holdings, to defer delivery for four jack-ups in all.

Keppel said that the group does not require any further provision beyond the S$230 million set aside for the semi-submersible rigs on order from the now bankrupt Sete Brasil. This takes into account "substantial deposits" placed with the orders and the calibre of its customers.

Mr Chow also noted increases in enquiries for floating production units, floating storage and regasification units and Jones Act vessels, which represent pockets of opportunities that are still remaining in the O&M sector.

Keppel Corp has also completed the restructuring of its four asset management businesses - Keppel Reit Management, Alpha Investment Partners and Keppel Infrastructure Fund Management as well as a 50 per cent interest in Keppel DC Reit Management - under Keppel Capital.

Mr Loh said Keppel Capital, with total AUM (assets under management) of S$26 billion, is intended to strength the group's recycling platform and provide a steady pillar of recurring income.

"Our Investments Division is Keppel's fourth business vertical, comprising the newly created Keppel Capital, and the group's holdings in associate companies k1 Ventures, M1 and KrisEnergy," Mr Loh said, adding: "We are confident that our multi-business strategy continues to stand us in good stead and, through these challenges, Keppel will emerge stronger."

Keppel declared an interim dividend of eight Singapore cents per share, down from 12 cents a year ago.

Shares in Keppel Corp closed two cents lower at S$5.58 on Thursday.

This article was first published on July 22, 2016.
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