Interview with
the CEO

Describe your first year at the helm of Keppel Corporation. How do you see Keppel under your leadership?
I am privileged to be guided and supported by a strong and wise Board, building on the solid foundation of my predecessors Chiau Beng and the late Soon Hoe. Backed by a loyal and dedicated team fired by the Can Do! Spirit, the leadership transition not only at Keppel Corporation but also the business units, I must say, has been enviably smooth.

Our vision is to become a global leader in our chosen industries, shaping the future, doing well and doing good, for the benefit of all our stakeholders. We aspire to be the best-in-class global conglomerate with strong verticals, offering the best value propositions to our customers through a continuous focus on enterprise and innovation, anchored on strong execution. Our focus on businesses that support the world's need for energy as well as trends in urbanisation, energy efficiency and sustainability remains unchanged.

There are immediate tasks navigating the headwinds we are facing in the Offshore & Marine (O&M) and Property businesses. But we are staying the course on a multi-year roadmap with reasonable targets to take the Group into 2020, to achieve growth, build a stronger Keppel, and develop and maximise the potential of our people.
With the sharp decline in oil prices and global exploration and production spending cuts, how will Keppel navigate the downturn?
The turbulence in the industry today has not altered the long-term fundamentals of this business. The world's growing population will demand more energy while major producing oil fields are declining rapidly. At an average decline rate of 5% each year, the world could lose as much as 20-30 million barrels per day (mbpd) within 5 years, which is about the average consumption rate in Asia.

As conventional reserves are exhausted, oil companies will need to push the limits of technology to gain access to resources in deeper water and harsher frontiers, which today's low oil prices do not effectively support. The oil and gas sector will inevitably move towards a new equilibrium, driven by demand and supply dynamics, as experienced in previous cycles. As things stand today, the over production of oil is no more than 1.5 mbpd, less than 2% of the 93 mbpd of total oil production.

While we cannot be certain how long before oil price stabilises, before companies find comfort in E&P spending, Keppel is in a stronger position today with a solid contract backlog of $12.5 billion as at end-2014, filled mainly by established customers. This will keep our yards busy for the next two years, and allow us to remain selective of projects that translate into reasonable margins for the Group, without taking undue risks.

Despite current oil price levels, some offshore prospects are still viable in geographies such as Southeast Asia, the Middle East and Latin America. We are also likely to see an acceleration in the replacement of the large global fleet of rigs aged 25 years and above.

Granted that not all new rigs will be delivered as scheduled, those that do enter the market in 2015-2016 are likely to take on lower dayrates to stay active. This will force older rigs which are less efficient and less productive into idling. They are likely to be scrapped as they are costly to upgrade and re-deploy.

We have seen an average attrition rate of 12 rigs per year from
2011-2014, compared to four rigs annually in the preceding 11-year period. The scrapping is healthy for the offshore drilling industry as capacity is being taken out from the market gradually, making headroom for dayrates to rise again. The market will find its equilibrium.

We will continue to build on our core strengths in execution and technology, as well as invest in R&D and productivity to come up with even better solutions and value propositions for our customers. We will also continue to extend our Near Market, Near Customer strategy by accessing the Mexican and Chinese rig markets, both of which hold huge promise.
Do you expect any customers to cancel or reschedule projects which Keppel's yards are currently executing?
No, we do not expect any rig cancellations. Over the years, Keppel has been disciplined about taking on well-defined contracts with acceptable pricing and payment terms from reputable customers to ensure that the Group is adequately compensated for the risks that it will assume.

Our orderbook is filled mainly by established customers who have made substantial down payments for their rigs. It would not make sense for any of them to cancel their projects, which are progressing well on track.

We will, if genuine need arises, facilitate customers who seek to defer their rig deliveries but they may have to incur additional costs.
Keppel has endeavored to offer value-added technology and solutions to its customers, such as the Floatel Victory built for Chevron.
The situation in Brazil seems to have worsened with Petrobras' corruption scandal and Sete Brasil's funding problems. What is the impact on your operations in Brazil and how is Keppel mitigating the risks?
I would like to reassure our stakeholders of the Group's integrity and our Code of Conduct which prohibits bribery and corruption, among other unethical behaviours. We comply strictly with international standards of anti-corruption, as well as the applicable laws and regulations of our host countries, guided by the Group's robust risk management framework and internal controls.

The first three of six DSS™ 38E semisubmersibles being constructed for Sete Brasil at our BrasFELS shipyard are on track. They are respectively over 85%, 50% and 25% completed and we have received payments for them up to November last year. We have also received a 10% down payment for the remaining three units.

Although there have been some delays in further payments, we do not expect Sete Brasil to cancel their projects with Keppel, considering the significant progress that we have achieved on the construction of these rigs.

We have also been assured by our customer that they have been working hard to get long-term funding in place.

Despite the challenging market in Brazil, Keppel has been able to navigate it well over the past 15 years by being prudent. We scope our contracts very carefully and are mindful of only taking on projects that we are confident of executing safely, on time, on budget and within good margins. We have also been investing sensibly to enhance our facilities, execution and productivity, so as to ensure that we are always functioning at an optimal level. Over commitment in capex spending in good years for a cyclical industry can be value destroying; this is something we have always been very disciplined on.

In addition to Petrobras and Sete Brasil, BrasFELS also serves a diverse base of other operators and drillers such as Modec, Noble, Diamond and Ensco. While remaining watchful of developments in Brazil, I am confident of our ability to weather the present uncertainties. Until Petrobras puts its house in order, short-term news flow from Brazil is expected to be negative.
With the present market conditions, there should be many good merger and acquisition opportunities in the O&M sector. How do you plan to capture opportunities for growth?
Sure, there will be many opportunities that surface in times like these, when valuations are depressed, which Keppel can consider because of our strong balance sheet. However, the key is to ensure that all potential acquisitions fit in well with the Group, and bring an acceptable level of risk adjusted returns.

Strong execution is integral to the Group's long-term success, and we have been active and hands-on in managing all our business units and ensuring that they have the required resources to excel. Our shareholders are reaping the benefits of our long-established global network, comprising mainly mothballed or brownfield shipyards that we have acquired at attractive prices and then turned into productive, high-yielding assets. Had we invested heavily in building brand new yards in the last couple of years, we would have been stricken by the current downturn.

That said, we remain committed to build and grow all our businesses in ways that will give us sustainable competitive advantages and ensure that Keppel can continue to provide the best value propositions to our customers. We will continue to invest sensibly in R&D to come up with viable technology that can be commercialised in the near term, as well as better processes to raise the skillsets and productivity of our yards. We will also explore potential partnerships with customers in niche markets that require solutions for floating accommodation, Floating LNG, and Plug and Abandonment, to name a few.
Keppel Land continues to strengthen its presence in Asia with iconic projects such as the International Financial Centre in Jakarta.
The property sector continues to be challenged by residential cooling measures in Singapore and China, as well as slower growth in some developing countries where Keppel is present. What are your long-term plans to improve returns from the Property Division?
We believe that the medium to long-term outlook for property is good in the countries where we operate.

The prolonged cooling measures were intended by the governments of Singapore and China to prevent asset bubbles. While having kept a lid on home demand and prices, they have not undermined the inherent potential of these property markets nor the need to cater more homes for the widening middle-income group. That China has started to unwind some of its housing and monetary policies since 3Q 2014 is an encouraging sign.

Our goal is to develop Keppel Land into a multi-faceted property player, riding on urbanisation trends in Asia. Apart from residential development and trading, Keppel Land is also growing its presence in the commercial sector which continues to do well. Capitalising on our strong-cash, low-debt position, we are well-poised to seize attractive deals that may not be available in more normal market conditions. For instance, we have been able to capture growth prospects in key global cities ahead of economic recovery through selective private equity-type investments in New York and London, leveraging the expertise of Alpha Investment Partners (Alpha).

Our long-term growth plans for the Property Division is underpinned by an active capital recycling strategy. In 2014 alone, Keppel Land extracted net proceeds of over $1 billion from divestments, adding to our war chest for new investments. We will continue to monetise matured projects while generating stable income streams through our established property fund management business.
Gore Hill Data Centre in Australia was among several assets injected into the newly-listed Keppel DC REIT as part of the Group's efforts to recycle capital and maximise shareholder value.
What is the longer term strategy for the Infrastructure Division, and how does it fit it with your vision for the Group?
Rapidly growing populations and rising incomes in emerging cities will give rise to vast opportunities for infrastructure, energy and property across the world. Our key businesses, be it O&M, Infrastructure or Property, are each uniquely positioned to meet the long-term needs of urbanisation in a sustainable way.

Since Keppel Infrastructure (KI) was formed over a year ago, we have steadily sharpened our focus on energy-related infrastructure and services, and made good progress on wrapping up the outstanding Engineering, Procurement and Construction (EPC) projects in Qatar and the UK. We have also been pre-qualified to tender for Singapore's sixth incineration plant.

To fully exploit our core strengths in project engineering and development, we will converge on building, owning and operating our own infrastructure assets, which we can potentially recycle for higher returns when they mature.

To this end, we announced that we would combine Keppel Infrastructure Trust (KIT) with CitySpring Infrastructure Trust, as well as the planned injection of 51% interest in Keppel Merlimau Cogen Pte Ltd, which owns the 1,300 MW co-geration plant, into the enlarged entity. With better scale and liquidity from a market capitalisation of above $2 billion and total assets of over $4 billion post-transactions, KIT would be well-positioned for future growth.

In the same vein, we listed Keppel DC REIT on the Singapore Exchange, raising a total of $513 million through a landmark initial public offering. Keppel DC REIT's portfolio comprises eight high-quality data centres across Asia Pacific and Europe, constituting $1 billion of assets under management.

Both KI and Keppel Telecommunications and Transportation will continue to fuel the growth of their respective fund management units by developing a stable pipeline of quality assets for injection, while earning recurring income such as operations and maintenance fees and facilities management fees. These initiatives are part of our concerted efforts to reshape and strengthen the Infrastructure Division into a sturdy third pillar for the Group.
Please elaborate on Keppel's capital recycling strategy and what you think would be the optimal capital structure for the Group.
Our goal is to maintain an institutional quality balance sheet with sufficient headroom to pursue interesting opportunities across our industries and pay sustainable dividends. As a Group, we do not see ourselves gearing up too much, or beyond 1x, to generate higher returns. This means that we have to do things differently, looking at our margins, asset turns, and making our assets work much harder.

We believe that Keppel Corporation can capture value by capitalising on its ability to create good infrastructure and real estate assets, which we can own, manage and stabilise before monetising. Matured assets are better suited to the real estate and business trusts, whose investors seek stable, recurring income and are prepared to accept lower returns on those assets.

As Keppel Corporation's shareholders are looking for higher returns, we will have to continue recycling capital rigourously to earn the best risk-adjusted returns from our assets. Over the past five years, we have been able to realise gains from revaluations, impairments and divestments (RID) averaging $400 million per year. Gains from RID are a recurring aspect of the Group's earnings and should not be viewed as one-offs. In fact, they are part and parcel of our business, from which we pay dividends. For FY 2014, we will be distributing 46% of our entire net profit, which includes RID, to shareholders.
Some brokers have applied an even wider conglomerate discount to Keppel Corporation's stock following the proposed offer to privatise Keppel Land. What are your views on this? What will the Group's earnings mix look like in the future?
Keppel's current business mix is the result of a deliberate and considered strategy, which has been constantly refined with the guidance of our Board. We have, over the years, been disciplined both in investing for growth as well as pruning non-core operations and assets for better returns. This has instilled in Keppel the acumen, agility and financial strength to emerge stronger and more resilient with every crisis.

We will continue to invest in growing all our businesses. In the next two years, our O&M Division would continue to bolster the Group's earnings with its $12.5 billion net orderbook, while the Property Division could stand to benefit from the gradual unwinding of cooling measures in China as well as improving markets in Vietnam and Indonesia. Finally, with the EPC contracts largely concluded, we would be able to grow our Infrastructure Division into a valuable contributor to the bottom line.

Our strong performance and earnings visibility in the current climate suggest that the conglomerate discount applied by some analysts is unreasonable. With a market capitalisation of about $15.9 billion in February 2015, Keppel Corporation has been trading at single-digit multiples, although our performance and dividend distributions have been consistently strong. RID, which has contributed to the Group's performance year on year, should not be dismissed. Ultimately, we would like market appraisals to reflect the true long-term value that Keppel will create.