Keppel : Q&A transcript

Keppel Corporation 1Q 2022 Business Update

Media & Analysts Conference Call Transcript

21 April 2022, 6.00pm

LCH	Loh Chin Hua, CEO of Keppel Corporation
CHC	Chan Hon Chew, CFO of Keppel Corporation
CT	Christina Tan, CEO of Keppel Capital
CO	Chris Ong, CEO of Keppel Offshore & Marine
LL	Louis Lim, CEO of Keppel Land
CL	Cindy Lim, CEO of Keppel Infrastructure
TP	Thomas Pang, CEO of Keppel Telecommunications & Transportation
MSM	Manjot Singh Mann, CEO of M1

Opening remarks by Loh Chin Hua, CEO of Keppel Corporation

Analysts and friends from the media, we have issued a media release and slides to provide a quarterly update on Keppel's performance in 1Q 2022. Let me highlight a few key points.

Despite a volatile global environment, exacerbated by the war in Ukraine, Keppel performed strongly in 1Q 2022, as we continued to accelerate the execution of Vision 2030.

In line with the Group's strategy to simplify and focus our business, and enhance our earnings, Keppel Telecommunications & Transportation (Keppel T&T) has signed an agreement with Geodis International to divest its logistics business in Singapore, Malaysia and Australia, as well as UrbanFox.

Significant progress has also been made in the discussions on the proposed combination of Keppel Offshore & Marine (Keppel O&M) and Sembcorp Marine, as well as the sale of Keppel O&M's legacy rigs and associated receivables to an Asset Co, which would be majority owned by external investors. Both Keppel and Sembcorp Marine announced at the end of March 2022 that more time and deliberation were required, and that we are committed to working towards a definitive agreement by 30 April 2022.

We continued to execute our asset monetisation programme and announced S$332 million in monetisation in the year to date.

So far, over S$3.2 billion in asset monetisation has been announced since the launch of our programme in Sep 2020, of which about S$2.8 billion has been received in cash by end-March 2022. We are now working on further waves of monetisation.

With the progress achieved to date, we are confident of exceeding our S$5 billion target by end-2023.

For 1Q 2022, Keppel continued the positive momentum in 2021, and achieved a higher net profit year-on-year. Apart from Urban Development, all segments delivered higher profits.

KI's net profit improved strongly, while M1, Keppel Data Centres and Keppel Capital registered improved performance. Keppel O&M's performance also improved, reporting a significant reduction in net loss.

The Group's revenue was 9% higher year-on-year at S$2.1 billion, underpinned mainly by revenue growth in the Energy & Environment segment.

Net gearing of 0.69x as at end-Mar 2022 was comparable to the 0.68x at the end of 2021.

Keppel O&M was EBITDA positive in 1Q 2022. Its Op Co1 was also profitable, in line with the increasing top line, slimmer operations and a more efficient level of overheads. Keppel O&M's revenue rose 22% year-on-year, due to higher levels of activity as it executes its sizeable orderbook. In 1Q 2022, Keppel O&M won new orders of S$76 million and is currently pursuing a strong pipeline of projects. As at end-March 2022, Keppel O&M had a net orderbook of S$4.8 billion.

With the increase in oil price, the outlook of the O&M market continues to improve. Keppel O&M is actively pursuing bareboat charters for several of its legacy rigs and has also received sales enquiries. Given the improving market conditions, we are confident of substantially monetising Keppel O&M's legacy rigs in the next 3-5 years.

In the meantime, Keppel O&M will continue to maintain a lean cost structure to stay fighting fit, even as its workload increases.

Keppel Infrastructure's (KI) 1Q 2022 net profit grew strongly year-on-year. Its revenue grew 57%, driven by higher Power & Gas sales, and higher revenue recognition from the Hong Kong Integrated Waste Management Facility. Significantly, KI is growing its presence in renewables, clean energy and decarbonisation, in line with our Vision 2030 strategy. This includes participating in the Energy Market Authority's request for proposal (RFP) for low-carbon power import licences in Singapore, signing Memorandums of Understanding (MOUs) with industry leaders to develop and capture opportunities in the growing market for sustainable energy solutions, as well as to innovate and catalyse ASEAN cross-border renewable energy trades.

In line with our efforts to develop decarbonisation solutions, KI also recently completed a feasibility study on carbon capture integration for the Runcorn EfW (energy from waste) facility in the UK. This is one of the largest and most efficient EfW facilities in Europe, which was designed and built by KI, using Keppel Seghers' proprietary technology.

Keppel Land continues its transformation to be an asset-light urban space solutions provider. In 1Q 2022, it announced the monetisation of its stake in a project company in Ho Chi Minh City, in line with the Group's asset-light model. Keppel Land also announced the acquisition of three land plots in Hanoi, with the Keppel Vietnam Fund and its co-investor.

Keppel Land's 1Q 2022 net profit was lower, mainly due to lower contributions from China and the absence of enbloc sales compared to 1Q 2021. Homes sales were also lower, mainly due to timing of new project launches, which are only slated to take place later this year.

In China, sentiments have turned more cautious after the debt crisis affecting developers. The recent lockdowns have also caused some short-term disruptions to operations in affected cities. Nevertheless, we remain optimistic and confident about opportunities in China over the mid to long-term, driven by continuing economic growth and urbanisation trends.

1 Op Co refers to Keppel O&M excluding the legacy completed and uncompleted rigs and associated receivables and its interests in Floatel and Dyna-Mac.

We will continue to drive asset monetisation to unlock value from Keppel Land's residential portfolio. We disclosed in our 2021 Annual Report that Keppel Land had a residential portfolio held at historical cost of about S$3.8 billion, but whose market value at the end of 2021 was about S$6.6 billion. We will work towards realising this substantial value, which has not been fully appreciated by the market.

In our Connectivity segment, we continue to scale up in data centres and the adjacent subsea cable business. As we grow our portfolio of data centres, we are also actively working to lower their carbon footprint, including through exploring energy-efficient floating data centres, as well as a green data centre park concept, with a green hydrogen supply chain to support Singapore's digital needs.

In the subsea cable business, the development of the Bifrost Cable System is progressing well. We have seen strong demand for the cable, with three of Keppel's fibre pairs already committed.

M1's 1Q 2022 net profit and revenue were higher year-on-year. Revenue from the enterprise segment, in particular, grew 30% year-on-year. With the reopening of borders and progressive lifting of travel restrictions, the outlook for the roaming and pre-paid business is improving. M1 is also progressing well with the 5G Standalone Network roll-out. We have achieved over 65% outdoor coverage as at end-March 2022, and are working towards nation-wide outdoor coverage by early-2023.

In the Asset Management segment, Keppel Capital also delivered stronger operating results. Significantly, asset management fees2 grew almost 70% compared to 1Q 2021. Keppel Capital also completed S$2.5 billion of acquisitions during the quarter. Across the Group, business units are actively collaborating with Keppel Capital to recycle capital or tap third-party funds for growth, whether in the Energy & Environment, Urban Development or Connectivity businesses. With growing concerns about inflation, many investors are looking for real assets with cash flows. These are precisely the kinds of solutions that Keppel provides.

We have emphasised our commitment to sustainability, both in terms of running our business sustainably and making sustainability our business. You would have seen from our different announcements that we are providing or exploring many different solutions that can help governments and our customers get to net zero.

To further sharpen our focus on sustainability, we announced today that the Board of Keppel Corporation has decided to establish a new Board Sustainability and Safety Committee with effect from 1 May 2022. The role of the existing Board Safety Committee will be subsumed under the terms of reference of this new committee. Earlier this year, we also appointed our first Chief Sustainability Officer to drive the Group's sustainability efforts.

In short, we have started 2022 on a positive note, with 1Q results stronger year-on-year. We will continue to deliver on Vision 2030, including executing our asset monetisation programme, simplifying and focusing our business, pursuing new growth areas aligned to our vision, growing recurring income and improving earnings. All this will be executed with sustainability at the core of our strategy, as we contribute to the global sustainability agenda and combating climate change, and create value for our stakeholders.

2 Includes 100% fees from subsidiary managers, joint ventures and associated entities, as well as share of fees based on shareholding stake in associate with which Keppel has strategic alliance.

Thank you.

Question & Answer session

Questions from Rahul Bhatia, HSBC Global Research

Thanks for taking my questions. I have three questions. Firstly, can you share insights on what are some of the discussion points that have prolonged the timeline to finalise the Offshore & Marine (O&M) merger agreement? And should we expect Keppel to disclose details related to the Asset Co side as well by end of April? Secondly, would you be interested to acquire asset management companies to grow AUM (assets under management) inorganically and what kind of valuation are you prepared to pay? Finally, I noticed that you mentioned receiving sales enquiries for some of the rigs. Can we expect some transactions in the near future, and based on the enquiries you received so far, do you think you may need to take some impairments to sell these rig assets, or are the past impairments taken in 2021 more than adequate? Thank you.

LCH: Thanks Rahul for your three questions. I will try to answer them and my colleagues can pitch in as well. If we miss anything, I am sure you will remind me. On the first question, as I said in my opening remarks, we are making good progress. It is a very complex transaction and it has taken a bit of time for both sides. I think that is quite understandable. Since we are already getting quite close to the timeline, which is the end of April that both sides have committed to, I do not think that it is necessary to dwell on what else remains outstanding. We are getting to dotting the i's and crossing the t's.

On the asset management question about the multiples that we will pay, that is not something that we would share. Obviously, we do have a very strong business that Keppel Capital is growing organically. We will be selectively looking at strategic bolt-on acquisitions where it makes sense, but we do not disclose how much we are prepared to pay.

Last point on the rigs, I will ask Chris Ong to give a bit of colour, maybe just on the market and what is going on.

CO: Generally, the rig market has picked up quite significantly. There are a lot of activities and also charter tenders that are out there in the market. For Keppel O&M, through our Rig Co and Asset Co setup, we have people assigned and have been in contact with potential rig charters or buyers. The volume of enquiries has increased quite significantly, so we are quite confident that there will be parties that we can sit down with and talk to about either putting the rigs to use under a bareboat charter or an outright sale. Whether we will be expecting a transaction soon, we are optimistic, but we do not give forward-looking information. I hope that answers your question.

LCH: Just to supplement, I think you can see, Rahul, that the rig market, as you heard from Chris, is improving so we are starting to see utilisation rates improving quite quickly. Charter rates are slowly improving. Under the current situation, we believe that things are getting a lot better. That is why we are quite confident of being able to monetise the rigs over three to five years. Realistically, bareboat charter is probably very likely now. We may have a couple of opportunistic transactions in terms of sales. But because conditions are improving - we cannot predict the future, but based on what we see today - we believe that whatever provisions we have taken are more than adequate.

Should we expect more details related to the Asset Co transaction side as well by end of April?

LCH: The discussions on the Asset Co as well as the proposed combination are inter-conditional, so when an announcement is made, both transactions will be announced at the same time.

Questions from Lim Siew Khee, CGS-CIMB Research

I have got a few questions. Firstly, just want to hear some updates on China. I know that there is a lockdown etc. Could you give us an outlook on what is happening there and what should we be looking at in the next few quarters in terms of home sales or even project execution on China's side? That is my first question. Second question is, can I say that with revenue up so much in KI, the net profit would also grow in tandem or is there any EBIT margin squeeze in that segment? My third question would be also on the EBIT margin for other segments. Other than Urban Development, is there anything that we should be watchful of? And my last question is - I know that you said the pipeline is actually there, and you are bidding for some projects in O&M - is there anything that you can actually share in terms of project numbers, or are you just waiting for the definitive agreement to be more realistic in chasing pipelines?

LCH: Ok, thanks Siew Khee. I counted four questions. I will invite Louis Lim, CEO of Keppel Land to go through your first question on China.

LL: Hi Siew Khee, thanks for the question. As CEO mentioned just now, the China market is obviously going through quite a bit of uncertainty with the debt crisis last year and the lockdown. But we remain confident in the mid to long-term opportunities in the market and I wanted to add that the cities that we are in are quite resilient. So we see opportunities going forward. The other thing is that the local developers are a little bit more prudent, so that also gives us an opportunity to put equity with them on projects in China.

LCH: On your second question on the net profit of KI, this is a business update, so we cannot really tell you the net profit number. We can just tell you that it has significantly improved from last year, in line with the improvement in revenues. Hon Chew, would you like to share on the third question on margins?

CHC: As this is a business update, I do not think I can go into the details. We will give details when the announcement is out in the first half.

LCH: Ok, then the fourth question is on O&M in terms of enquiries and potential prospective contracts.

CO: I think the question revolves around whether we are waiting for the definitive agreement. Even after the definitive agreement, there will still be some time for regulatory approvals until the full closure of the deal. So in the meantime, we are still operating business as usual. When we say that we have a strong pipeline, it means that we are chasing quite a number of deals aggressively. The timing itself is not dependent on us. It also depends on the customers. Hopefully, in a very short time, we can give some good news. That is all I can say.

Questions from Anita Gabriel, The Business Times