12 Aug 2020
(Stocks Discussion) SGX: Keppel Corporation Limited (SGX: BN4)?
Discuss anything about share price, dividends, yield, ratios, fundamentals, technical analysis and if you would buy or sell this stock on the SGX Singapore markets. Do take note that the answers given by our members are just your opinions, so please do your own due diligence before making an investment!
Hey everyone! I'll list some thoughts I have here, mainly looking at some financials, business models and valuation for this stock.
Keppel Corporation** **is a Singapore-listed industrial conglomerate, with operations in property, offshore and marine, infrastructure and investments. This business should be a conglomerate, since the business operations seem diversified. For FY17, the revenue from the segments seem more or less equal, with property, offshore and marine having similar revenues and investments having the smallest. However, in FY18, revenue from Infrastructure is more significant.
Although revenue for FY18 was more or less similar with FY17, operating profit of almost 20% due to lower D&A, staff costs and impairment loss on financial assets. Profit Before Tax was almost 3X higher because of the one-off financial penalty and related costs. This led to net profit being 5X higher.
Keppel seems to possess strong short-term liquidity with a current ratio of more than 3, but much of its current assets come from amounts due from subsidiaries. Keppel Corp seems quite leveraged, with a D/E ratio of 1.5X and a Debt/EBITDA ratio of almost 25X.
A not so healthy sign is how working capital conditions had worsened, leading to Cashflow from Operating Activities becoming significantly lower. Improvements in cashflow from investing activities occured due to disposal of subsidiaries and associated companies. Lower cashflow from financing activities occured through lower issuance of debt and higher dividends being paid out.
As mentioned earlier, I believe concentration risk across sectors can be considered diversified. However I feel that the majority of revenue still comes from Singapore, so there are significant risks associated with our economic conditions here, such as demand for infrastructure, government policies and regulation and Singapore market, as reflected by their 3Y monthly Beta of 1.48.
Capital Intensive Business
Much of Keppel's increase in cash balances can be attributed to their cashflows from investing activities. If you look at their breakdown, capital expenditures and investments in other entities seem to be a large part of Keppel's growth and acquisition strategy. Such significant cash outlay projections may be unsustainable, since Keppel's cashflow from operating activities have fluctuated. Working capital management thus are a big part of their operating strategy.
Shares of Keppel Corp fell yesterday (11 August 2020) following the unexpected announcement by Temasek Holdings that it will pull out its $4 billion partial offer as a result of the conglomerate’s poor financial showing.
The fall in share price came amid investors' concerns over the future of Keppel. Keppel's stock plummetted by over 12% in early trading yesterday before picking up to close down 11% at $4.80.
Back in October 2019, Temasek owned about 20% of Keppel and offered to buy an additional 30% stake if the company met key conditions and there were no material unfavourable change in the group’s financial performance. It was stated in the agreement that the conglomerate’s profit after tax shouldn’t fall beyond 20%, or $557 million, over the cumulative four quarters from the third quarter ended September 2019.
Earlier in Aug, Temasek announced that it will come to a decision on whether it will continue with the partial buyout after Keppel breached a precondition following Q2 losses at nearly $698 million.
The decision to withdraw the bid surprised markets, investors and analysts as Temasek was expected to lead consolidation in Singapore’s offshore and marine industry.
Temasek Holdings' proposed $4.08 billion deal to take majority control of Keppel Corporation could pave the way for consolidation in Singapore's offshore and marine industry.
Despite Temasek decision to drop the bid for Keppel, I think Keppel’s future remains promising given that the industry remains strategic to Singapore and it has been able to diversify itself to be more than just offshore and marine. That being said, the conglomerate will need to first fix issues with its current structure in order to solve complex underlying issues in the offshore and marine industry.
Shares of Keppel Corporation are currently trading at $4.82 as of 12 August 2020 at 11.09am.
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