The fall in oil prices, the expected reduction in global oil and gas upstream spending and the projected oversupply of oil rigs has created a challenging environment. The Offshore & Marine (O&M) Division secured $5.5 billion of orders for the year, bringing its net order book at the end of 2014 to $12.5 billion with deliveries extending into 2019. The healthy order book will keep the yards busy for 2015 and 2016. The global consumption of energy is projected to grow and is expected to sustain the oil and gas business. The O&M Division will continue to leverage technology and innovation to improve its competitive edge as well as productivity and efficiency. It will focus on expanding its Near Market, Near Customer strategy.
In the Infrastructure Division, Keppel Infrastructure (KI) will remain focused on its power and gas, as well as its other energy-related infrastructure businesses. KI's planned disposal of its 51% stake in the Keppel Merlimau Cogen Pte Ltd, which owns the 1,300 MW co-generation plant, to Keppel Infrastructure Trust (KIT) will unlock capital and position it to capture new growth opportunities. Keen competition is likely to persist in the electricity market but KI's integrated gas-to-power business platform will enable it to weather the challenges ahead. Keppel Telecommunications & Transportation (Keppel T&T) will continue to develop both logistics and data centre businesses locally and overseas. It will also focus on growing a pipeline of quality data centre assets for injection into the newly-listed Keppel DC REIT.
During the year, the Property Division sold about 300 homes in Singapore and 2,100 homes overseas. Total assets under management by Keppel REIT and Alpha stood at $18.7 billion as at end-2014. The Division will continue to maintain its presence in its core and growth markets while seeking to invest opportunistically. It also seeks to strengthen its commercial portfolio overseas.
The Group will continue to execute its multi-business strategy, building on its core strengths and strong foundations, while staying agile to seize new opportunities.
Despite higher net profits, Return on Equity (ROE) was lower at 18.8% for 2014 due mainly to higher equity.
The Company will be distributing a total cash dividend of 48 cents per share for 2014 comprising a final proposed cash dividend of 36 cents per share and the interim cash dividend of 12 cents per share distributed in 3Q 2014. Total cash dividend for 2014 represents 46% of Group net profit. On a per share basis, it translates into a gross yield of 5.4% on the Company's last transacted share price of $8.85 as at 31 December 2014. Over the past six years, total distribution payout represents 40% to 83% of Group net profit.
In 2014, EVA rose by $636 million to $1,778 million. This was attributable to higher operating profit, partially offset by higher capital charge.
The increase in operating profit was due to better operating results from the Offshore & Marine and Infrastructure Divisions, as well as divestment gains from investment properties and data centre assets.
Capital charge increased by $36 million as a result of higher Weighted Average Cost of Capital (WACC) and higher Average EVA Capital, partially offset by the adjustment for surplus cash. WACC increased from 6.00% to 6.45% mainly due to an increase in risk-free rate and pre-tax cost of debt. Average EVA Capital increased by $297 million from $18.93 billion to $19.23 billion.
The Group registered positive EVA since 2004, which reflects the Group's commitment to maximise shareholders' value through effective and efficient management of resources.
- Profit after tax excludes net revaluation gain on investment properties.
- The reported current tax is adjusted for statutory tax impact on interest expenses.
- Average EVA Capital Employed is derived from the quarterly averages of net assets, interest-bearing liabilities, timing provisions, present value of operating leases and other adjustments.
- Weighted Average Cost of Capital is calculated in accordance with the Keppel Group EVA Policy as follows:
- Cost of Equity using Capital Asset Pricing Model with market risk premium set at 5.5% (2013: 6.0%);
- Risk-free rate of 2.45% (2013: 1.32%) based on yield-to-maturity of Singapore Government 10-year Bonds;
- Unlevered beta at 0.83 (2013: 0.83); and
- Pre-tax Cost of Debt at 1.58% (2013: 0.89%) using 5-year Singapore Dollar Swap Offer Rate plus 45 basis points (2013: 80 basis points).
- For FY 2014, capital charge on surplus cash of $1,939 million was at the concession rate of 2.93% instead of WACC of 6.45%. This was due to the accumulation of surplus cash resulting from the advanced borrowing programme.
Group shareholders' funds increased from $9.70 billion at 31 December 2013 to $10.38 billion at 31 December 2014. The increase was mainly attributable to the retained profits for 2014, partially offset by payment of final dividend of 30 cents per share for FY 2013 and tax-exempt one-tier interim dividend of 12 cents per share for 1H 2014, fair value loss on available-for-sale assets and cash flow hedges, and share buybacks during the year.
Group total assets of $31.55 billion at 31 December 2014 was $1.50 billion or 5% higher than the previous year end. Increase in current assets was partially offset by decrease in non-current assets.
Higher current assets were mainly due to reclassification of the Keppel Merlimau Cogen power plant from fixed assets to assets classified as held for sale, higher stocks and work-in-progress for the O&M Division, acquisitions of development sites and expenditure incurred for development projects for the Property Division, and higher debtors arising from the O&M and Property divisions. The increase in current assets was partially offset by repayment of advances due from associated companies.
Lower non-current assets were due mainly to decreases in fixed assets, investment properties and associated companies. Lower fixed assets were largely due to reclassification of the Keppel Merlimau Cogen power plant to assets classified as held for sale, sale of data centre assets by the Infrastructure Division, partly offset by construction of logistics warehouses and other operational capital expenditure. Lower investment properties were mainly due to the sale of Equity Plaza.
Lower associated companies were mainly from dividends received from associated companies and sale of Marina Bay Financial Centre (MBFC) Tower 3, partly offset by share of the associated companies' profits.
Group total liabilities of $16.83 billion at 31 December 2014 were $0.46 billion or 3% above that as at 31 December 2013. This was due mainly to higher borrowings taken up for working capital requirements, increase in creditors from higher billings by suppliers offset by lower billings on work-in-progress in excess of related costs in the O&M and Infrastructure Divisions.
Group net debt of $1.65 billion is $0.11 billion higher than that as at 31 December 2013 due mainly to borrowings for land acquisition in the Property Division, dividend payments (by the Company and its listed subsidiaries) and other operational and capital expenditure requirements. The higher debts were partly offset by net proceeds from disposals of Equity Plaza, MBFC Tower 3, data centre assets and Keppel FMO Pte Ltd, and repayment of advances due from associated companies.
Keppel is committed to deliver value to shareholders through earnings growth. Towards achieving this, the Group will rely on its multi-business strategy and its core strengths, build on what it had done successfully and seize new opportunities when they arise.
Our 2014 TSR of negative 17.8% was 27.3 percentage points below the benchmark Straits Times Index's (STI) TSR of positive 9.5%. This was mainly due to a decrease in Keppel's share price as at end-2014 arising from the sharp decline in oil prices. However, the Company's Compounded Annual Growth Rate (CAGR) TSR over the past ten years of 13.7% was higher than STI's CAGR TSR of 7.6%.
To better reflect its operational free cash flow, the Group has excluded expansionary acquisitions (e.g. investment properties) and capital expenditure (e.g. building of new logistics or data centre facilities), meant for long-term growth for the Group, and major divestments.
Net cash from operating activities dropped by 99% to $5 million for 2014 as compared to $637 million for 2013. This was due mainly to higher working capital requirements from the Offshore & Marine and Property divisions.
After excluding expansionary acquisitions, capital expenditure and major divestments, net cash from investment activities was $724 million. The Group spent $662 million on investments and operational capital expenditure, mainly for the Offshore & Marine Division. After taking into account the proceeds from divestments and dividend income of $1,386 million, the free cash inflow was $729 million.
Total distribution to shareholders of the Company and non-controlling shareholders of subsidiaries for the year amounted to $1,029 million.
The Group operates internationally and is exposed to a variety of financial risks, comprising market risk (including currency risk, interest rate risk and price risk), credit risk and liquidity risk. Financial risk management is carried out by the Keppel Group Treasury Department in accordance with established policies and guidelines.
These policies and guidelines are established by the Group Central Finance Committee and are updated to take into account changes in the operating environment. This committee is chaired by the Chief Financial Officer of the Company and includes Chief Financial Officers of the Group's key operating companies and Head Office specialists.
The Group's financial risk management is discussed in more detail in the notes to the financial statements. In summary:
- The Group has receivables and payables denominated in foreign currencies viz US dollars, European and other Asian currencies. Foreign currency exposures arise mainly from the exchange rate movement of these foreign currencies against Singapore dollar, which is the Group's measurement currency. The Group utilises forward foreign currency contracts to hedge its exposure to specific currency risks relating to receivables and payables. The bulk of these forward foreign currency contracts are entered into to hedge any excess US dollars arising from the Offshore & Marine contracts based on the expected timing of receipts. The Group does not engage in foreign currency trading.
- The Group hedges against price fluctuations arising on purchase of natural gas. Exposure is managed via fuel oil forward contracts, whereby the price of natural gas is indexed to a benchmark fuel price indices, High Sulphur Fuel Oil (HSFO) 180-CST and Dated Brent.
- The Group maintains a mix of fixed and variable rate debt/loan instruments with varying maturities. Where necessary, the Group uses derivative financial instruments to hedge interest rate risks. This may include interest rate swaps and interest rate caps.
- The Group maintains flexibility in funding by ensuring that ample working capital lines are available at any one time.
- The Group adopts stringent procedures on extending credit terms to customers and the monitoring of credit risk.
The Group borrows from local and foreign banks in the form of short-term and long-term loans, project loans and bonds. Total Group borrowings as at the end of 2014 was $7.4 billion (2013: $7.1 billion and 2012: $7.2 billion). At the end of 2014, 24% (2013: 7% and 2012: 14%) of Group borrowings were repayable within one year with the balance largely repayable more than three years later.
Unsecured borrowings constituted 86% (2013: 87% and 2012: 81%) of total borrowings with the balance secured by properties and other assets. Secured borrowings are mainly for financing of investment properties and project finance loans for property development projects. The net book value of properties and assets pledged/mortgaged to financial institutions amounted to $2.70 billion (2013: $2.90 billion and 2012: $3.10 billion).
Fixed rate borrowings constituted 66% (2013: 53% and 2012: 57%) of total borrowings with the balance at floating rates. The Group has interest rate swap agreements with notional amount totaling $1,138 million whereby it receives variable rates equal to SIBOR and LIBOR and pays fixed rates of between 1.27% and 3.62% on the notional amount. Details of these derivative instruments are disclosed in the notes to the financial statements.
Singapore dollar borrowings represented 65% (2013: 67% and 2012: 82%) of total borrowings. The balances were mainly in US dollars, Renminbi and other Asian currencies. Foreign currency borrowings were drawn to hedge against the Group's overseas investments and receivables, which were denominated in foreign currencies.
Weighted average tenor of the loan book was around five years at the beginning and end of 2014 with a slight decrease in average cost of funds.
The Group maintains a strong balance sheet and an efficient capital structure to maximise return for shareholders. The strong operational cash flow of the Group and divestment proceeds from low yielding and non-core assets will provide resources to grow the Group's businesses.
Every new investment will have to satisfy strict criteria for best risk-adjusted return on investment, cash flow generation, EVA creation and risk management. New investments will be structured with an appropriate mix of equity and debt after careful evaluation and management of risks.
Capital employed at the end of 2014 was $14.73 billion as compared to $13.69 billion as at end 2013 and $13.58 billion as at end 2012. The Group was in a net debt position of $1,647 million as at end of 2014, which was slightly above the $1,535 million as at end of 2013 and an improvement from the net debt position of $3,153 million at the end of 2012. The Group's net gearing ratio was 0.11 times at the end of 2014, same as that of end-2013.
Interest coverage was 18.52 times in 2012, decreasing to 13.89 times in 2013 and then increasing to 15.35 times in 2014. Interest coverage in 2014 was higher due to higher EBIT and lower interest costs.
Cash flow coverage dropped from 6.50 times in 2012 to 3.97 times in 2013 and 1.11 times in 2014. This was mainly due to lower operating cash flows in 2014.
At the Annual General Meeting in 2014, shareholders gave their approval for mandate to buy back shares. During the year, 5,932,000 shares were bought back and held as treasury shares. There was no sale, transfer, disposal, cancellation and/or use of treasury shares during the year.
The Group continues to be able to tap into the debt capital market at competitive terms.
As part of its liquidity management, the Group has built up adequate cash reserves and short-term marketable securities as well as sufficient undrawn banking facilities and capital market programme. Funding of working capital requirements, capital expenditure and investment needs was made through a mix of short-term money market borrowings and medium/long-term loans and bonds and through the equity capital market.
The Group maintains flexibility in funding by ensuring that ample working capital lines are available at any one time. Cash flow, debt maturity profile and overall liquidity position is actively reviewed on an ongoing basis.
As at end of 2014, total funds available and unutilised facilities amounted to $11.02 billion (2013: $9.40 billion).
The Group's significant accounting policies are discussed in more detail in the notes to the financial statements. The preparation of financial statements requires management to exercise its judgment in the process of applying the accounting policies. It also requires the use of accounting estimates and assumptions which affect the reported amounts of assets, liabilities, income and expenses. Critical accounting estimates and judgment are described below.
The Group assesses at each balance sheet date whether there is any objective evidence that a loan and receivable is impaired. The Group considers factors such as the probability of insolvency or significant financial difficulties of the debtor and default or significant delay in payments. When there is objective evidence of impairment, the amount and timing of future cash flows are estimated based on historical loss experience for assets with similar credit risk characteristics. The carrying amounts of trade, intercompany and other receivables are disclosed in the balance sheet. As at 31 December 2014, the Group had credit risk exposure to an external group of companies for receivables that are past due. Management had considered any changes in the credit quality of the debtors when determining the allowance for doubtful receivables. Management performs on-going assessments on the ability of its debtors to repay the amounts owing to the Group. These assessments include the review of the customers' credit-standing and the ability of customers to secure long-term financing for the ongoing projects. Management had assessed that no allowance for doubtful debt is required.
The Group follows the guidance of FRS 39 in determining whether available-for-sale investments are considered impaired. The Group evaluates, among other factors, the duration and extent to which the fair value of an investment is less than its cost, the financial health of and the near-term business outlook of the investee, including factors such as industry and sector performance, changes in technology and operational and financing cash flows. The fair values of available-for-sale investments are disclosed in the balance sheet.
Determining whether the carrying value of a non-financial asset is impaired requires an estimation of the value in use of the cash-generating units. This requires the Group to estimate the future cash flows expected from the cash-generating units and an appropriate discount rate in order to calculate the present value of the future cash flows. The carrying amounts of fixed assets, investment properties and intangibles are disclosed in the balance sheet.
The Group recognises contract revenue based on the percentage of completion method. The stage of completion is measured in accordance with the accounting policy stated in Note 2(q) of the financial statements. Significant assumptions are required in determining the stage of completion, the extent of the contract cost incurred, the estimated total contract revenue and contract cost and the recoverability of the contracts. In making the assumption, the Group evaluates by relying on past experience and the work of engineers. Revenue from construction contracts is disclosed in Note 24 of the financial statements.
Revenue arising from additional claims and variation orders, whether billed or unbilled, is recognised when negotiations have reached an advanced stage such that it is probable that the customer will accept the claims or approve the variation orders, and the amount that it is probable will be accepted by the customer can be measured reliably.
The Group has exposure to income taxes in numerous jurisdictions. Significant assumptions are required in determining the provision for income taxes. There are certain transactions and computations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for expected tax issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recognised, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. The carrying amounts of taxation and deferred taxation are disclosed in the balance sheet.
The Group entered into various contracts with third parties in its ordinary course of business and is exposed to the risk of claims, litigations, latent defects or review from the contractual parties and/or government agencies. These can arise for various reasons, including change in scope of work, delay and disputes, defective specifications or routine checks etc. The scope, enforceability and validity of any claim, litigation or review may be highly uncertain. In making its judgment as to whether it is probable that any such claim, litigation or review will result in a liability and whether any such liability can be measured reliably, management relies on past experience and the opinion of legal and technical expertise.
The Group has approximately 45% gross ownership interest of units in Keppel REIT as at 31 December 2014 and 2013. Keppel REIT is managed by Keppel REIT Management Limited (KRML), a wholly-owned subsidiary of the Group. The Group has provided an undertaking to the trustee of Keppel REIT to grant the unitholders the right to endorse or re-endorse the appointment of directors of KRML at the annual general meetings of Keppel REIT. The Group has determined that it continues to have significant influence over Keppel REIT.
The Group has 49% gross ownership interest of units in KIT as at 31 December 2014 and 2013. Determining whether the Group has control over KIT requires management to exercise its judgment. In exercising its judgment, management considers the proportion of its voting rights and whether it can control the relevant activities of KIT. The business purpose and relevant activities of KIT are stated in the Deed of Trust which requires a special resolution to amend. In addition, the Board of Directors of KIT/Keppel Infrastructure Fund Management Pte Ltd, its trustee-manager, comprises more than 50% independent directors. Management concluded that the Group does not have sufficient dominant vesting interest to exert control over KIT and the Deed of Trust and therefore the Group only has significant influence over KIT.