Interview with the CEO



Keppel is fighting-fit and prepared to weather the volatile conditions, drawing on our collective strengths and hunting as a pack. We have, over the past two years, streamlined and restructured our key business verticals thoughtfully, sharpening focus, building resilience and growing our competitive advantage.

We are staying the course on a multi-business strategy, which has steadied the Group reliably through many a cyclical downturn. Creating and capturing higher value from all parts of Keppel, we will drive collaboration across verticals for synergy and recycle capital for the best possible returns.

Mr Loh Chin Hua, CEO of Keppel Corporation discusses how the Group is adapting to meet the challenges and transforming itself for the future.

The low oil price environment has taken a toll on Keppel. Are there any aspects of the Company that investors need to give more consideration to in the current climate?

Keppel is more than just an Offshore & Marine company. Our results in 2015 would have been much weaker had we been so. We are a multi-business group, and our strategy takes into consideration the different cycles of our businesses.

As we have shown, business cycles do attenuate in a diversified conglomerate such as Keppel. In spite of strong headwinds, as a Group, we made about $1.53 billion in profits for FY 2015 due to higher contributions from the Property and Investments divisions cushioning the impact of weaker earnings from Offshore & Marine.

These are creditable results, which point to how a sound and well-executed multi-business strategy can steady a ship in rough waters.

Of course, we want our engines firing on all cylinders. But even when we go through turbulence and one of the engines slows down, the other engines would be able to pick up the pace.

I believe that the market has yet to fully recognise Keppel’s merits as a conglomerate; that we have a set of unique strengths and potential synergies which can be harnessed, particularly through the cross-pollination of our business units.

The resilience and strength of Keppel should not be overlooked in the current environment. As a conglomerate, with access to capital and the ability to invest when times are tough, we will use this period to prudently sow into strategic areas and build new muscles to ride the upturn.

The offshore and marine industry is slipping deeper into the doldrums, with deflated oil prices, the crisis in Brazil and more project delays and possible cancellation risks. How will Keppel weather the long winter?

We are entering into the offshore industry downturn on a firm footing, anchored by our multi-business strategy. As distance tests a horse’s strength, so are we confident of riding out the turbulence and emerging stronger, like how we have done so over the past 48 years.

In spite of the challenges, Keppel Offshore & Marine (Keppel O&M) is still doing well, and had contributed $481 million or to a third of the Group’s income for the whole of 2015. Excluding the $230 million provision made for its projects with Sete Brasil, Keppel O&M’s underlying operating margins would have been 17.1% for 4Q 2015 and 13.4% for FY 2015. These are very respectable results, and they attest to the robustness of our core Offshore & Marine operations.

We know that this is a cyclical business. And even when times were better, we had been careful not to over-invest in growing our capacities. Our prudence has served us well.

However, we need to continue adapting ourselves to weather the present storm. The adjustment process is not simple, and we have to take a pragmatic approach to restructuring. Keppel O&M is keeping vigilant and rightsizing its operations to ensure that it keeps its overheads under control. In 2015, Keppel O&M’s overall direct staff strength came down by about 17% or about 6,000 positions, while its subcontract workforce in Singapore was lowered by 24% or about 7,900 positions. Manpower had also been redeployed from offshore to marine operations where resources are needed to manage a steady stream of repair and conversion projects.

After carefully assessing the situation in Brazil, we had stopped work on our semisubmersible projects for Sete Brasil by the end of 2015. We had also made a provision of $230 million for them, taking into account our construction progress, payments received and what is due from the customer and to our vendors, amongst other areas. This provision had been reviewed and approved by our Board and auditors. We think that it is appropriate and adequate for now, until there is more clarity on the situation and options available.

While some of our customers may have delayed their rig deliveries, the cancellation risks are not likely to be great as we have been disciplined in taking on quality contracts with sound pricing and payment terms. We will continue to work hand-in-glove with our customers, ensuring that we execute and deliver quality projects to their satisfaction.

Working capital needs should increase as more of your customers defer their rig deliveries. Are you concerned about the Group’s gearing, and what are you doing to keep it at a reasonable level?

Amidst the current challenges, we are keeping a watchful eye on our gearing and cash flows, exercising financial discipline to maintain an institutional quality balance sheet.

We will continue to execute our orderbook well, and deliver our projects on time and within budget. Our focus will be on improving margins and productivity, and rightsizing. These efforts will help ensure that we can remain profitable in Offshore & Marine even with a lower top line.

For our asset heavy businesses, we would want our assets to work harder and recycle them at the right time. The creation of Keppel Capital will not only improve our ability to recycle capital into the various REITs and Trusts but also allow us to expand our capital base through the creation of private funds in our real estate, infrastructure and energy space.

A case in point is how we have raised about $3.5 billion by recycling property and infrastructure assets like Marina Bay Financial Centre Tower 3, Keppel Merlimau Cogen (KMC) and our data centres. That, coupled with the deconsolidation of Keppel REIT from our balance sheet in 2013, has enabled us to privatise Keppel Land for $3 billion whilst still keeping our net gearing at a comfortable level.

We will be maintaining our debt to equity ratio below 1x; this is a comfortable level for a diversified group like Keppel. It will keep us nimble whilst providing sufficient headroom to respond to opportunities and challenges effectively.

Notwithstanding the present gloom, which are some of the bright spots you see in the Offshore & Marine business? How is Keppel making use of this crisis period to prepare itself to capture these opportunities?

While the oil and gas industry that we serve is tracking a difficult path to recovery, I am confident that the market, supported by sound fundamentals, will eventually rebalance itself. The current low oil prices will gradually boost demand and reduce supply. At some point, the oil companies would have to spend to replenish their reserves.

Meanwhile, our focus in 2016 will be on executing our projects with our customers well, and delivering them safely, on time and on budget. We will continue pursuing opportunities in the non-drilling market where there is still demand for solutions like accommodation semisubmersibles, Plug & Abandonment jackups, liftboats and specialised vessels.

We will also seek out opportunities in niche markets where we can establish a competitive advantage through our technology and Near Market, Near Customer strategy. The acquisition of LETOURNEAU™ for instance, will not only expand our suite of jackup rig designs but also broaden aftermarket sales and services to customers.

The gas industry continues to be a very interesting space where Keppel’s aspirations and capabilities in the LNG business stretch across the value chain. Alongside the FLNG solutions that we are converting for Golar LNG, we have also expanded our technology suite with onshore and offshore liquefaction and LNG transportation solutions.

We have recently been awarded a licence to supply LNG bunker to vessels in the Port of Singapore jointly with BG Group, now Shell. Together, we will deliver end-to-end bunkering solutions in 2017, leveraging their diversified LNG portfolio and Keppel O&M’s expertise servicing in LNG vessels. As the demand for green solutions in the shipping industry rises, we will be in a strategic position to cater solutions and services such as designing tugs with dual-fuel diesel LNG engines and retrofitting vessel engines to run on LNG.

We shall not waste a good crisis. This downturn presents opportunities to improve on our expertise and processes and grow our competitive advantage. As we hunker down, we will also continue investing prudently in our human capital and new capabilities, which will stand us well in the upturn.

What about the other businesses in the Group? The takeover of Keppel Land was the most significant corporate action in 2015, how has that met your objectives?

The Property Division, at 46%, was the largest contributor to the Group’s net profit for 2015. This has clearly bolstered our performance and speaks volumes of the timeliness of Keppel Land’s privatisation.

Not only was it immediately accretive, Keppel Land’s privatisation had also brought the interests of our Property Division into full alignment with the Group. The transaction has resulted in $252 million of additional contributions to Keppel Corporation, after taking in the interest cost of $15 million.

At the Group level, we now have a simpler corporate structure and better control over all our key business verticals. With the ability to regulate the property balance sheet in response to opportunities, we can more effectively recycle capital and allocate resources across the Group for the best possible returns.

What are your aspirations for the Property Division now that Keppel Land has been privatised?

Keppel has been in Property for more than 30 years. We know this business very well and have built up a strong track record and brand name in Asia. In terms of Return on Equity, Keppel Land is one of the best performing property companies in Asia, returning an average of 18.9% per annum for a decade since 2006.

Our aim 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.

To be a leader in the property industry does not mean that we have to be the biggest player. We want instead to be a property developer with the highest return in Asia, and that will be our focus for the Property Division moving forward.

There has been quite a bit of restructuring in Infrastructure, what are your plans for this Division? Concerning the difficult Engineering Procurement and Construction (EPC) projects in the UK and Qatar, are you finally out of the woods?

Since the integration of Keppel Energy and Keppel Integrated Engineering in mid-2013, we have covered good ground in reshaping our Infrastructure Division into a stable third leg for the Group. Today, this Division comprises Keppel Infrastructure, which focuses on energy-related infrastructure, and Keppel Telecommunications & Transportation (Keppel T&T), which operates our data centre and logistics businesses. It is a much clearer and more efficient structure.

Through streamlining and the divestment of non-core operations such as the facilities management company Keppel FMO, Keppel Infrastructure has brought sharper focus to our environmental engineering business. This has also given us the needed clarity and bandwidth to tackle our challenging EPC projects in the UK and Qatar. These projects, I am pleased to say, have been largely completed and handed over in 2015.

Our EPC journey, arduous as it was, has equipped us with invaluable experience and insights for creating high quality infrastructure assets worldwide. With a difficult chapter behind us, our team will focus on opportunities to build, own and operate related assets. These will be in areas where we have strong technical knowledge and deep understanding of the markets and key value chains.

Like Property, the Infrastructure business is asset heavy. Once these assets have been stabilised and de-risked, we will monetise them and recycle the capital into projects with a higher rate of return. Replicating the success achieved between Keppel Land and Keppel REIT, we launched Keppel DC REIT at end-2014 and merged Keppel Infrastructure Trust with CitySpring Infrastructure Trust in 2015.

Through the injection of data centre assets and 51% of KMC respectively into Keppel DC REIT and Keppel Infrastructure Trust, we have gained a total of $419 million. Being Sponsor to our REITs and Trust, we continue to participate in the growth of our asset management units, whilst building up a solid platform for the Group to recycle its capital.

Tell us more about what is happening to the Investments Division, which until now had been mainly a segment for reporting non-core investments. What is the thinking behind the integration of the Group’s asset managers under Keppel Capital Holdings in this Division?

We are taking a long term view on developing our Investments Division into a pillar of recurring income for the Group.

Through the years, Keppel has built up an enviable track record for developing high quality assets, as well as operating and managing them. Today, we oversee a total portfolio of $26 billion in property and infrastructure assets, which has grown at a rate of 30% per annum for over a decade since 2006. For FY 2015, Alpha Investment Partners (Alpha), the managers of Keppel REIT and Keppel DC REIT and the Trustee-Manager of Keppel Infrastructure Trust, contributed a total of $60 million in recurring fee income to the Group.

To sustain growth and value creation, we need to build and maintain a robust ecosystem for recycling assets created by our business verticals. This was the objective for integrating our asset managers under Keppel Capital, and reporting them as a new segment in our Investments Division.

This timely restructuring provides greater focus and scale to our asset management business and the vehicles managed. By bringing together the strengths of our four asset managers, we can create synergies by centralising certain non-regulated support functions, as well as enhance talent recruitment and retention, and the sharing of best practices.

Many institutional investors have told us that they want to get closer to the coal face to own niche assets in the offshore and marine, infrastructure and data centre industries. These investors appreciate a partner like Keppel who is not only able to create quality assets but also manage them, and who is prepared to align interests by putting in part of its balance sheet.

Through Keppel Capital, we will be looking to create more private funds and co-investment vehicles with like-minded investors, which will expand our capital base to seize opportunities without putting a strain on our balance sheet. By enlarging the pie with like-minded co-investors, we can give the Group even greater financial capacity to grow.

With diverse businesses each having their own needs, how would you prioritise capital allocation across the Group?

We are acutely mindful of deploying our capital to earn the best risk-adjusted returns. With a simplified corporate structure and almost full control of the Group’s key business verticals, we now have more flexibility in deploying capital and other resources across the Group than before.

When we select projects, we take a bottom-up approach, which allows us to assign resources to those that best meet our strategic goals and hurdle rates. We can also look forward to growing our capital base, tapping co-investors with the likes of pension and sovereign wealth funds and other institutions to seize opportunities in our chosen sectors.

We have looked at each business unit in some detail, the next question is, how will you make Keppel into a greater whole than the sum of its parts?

That’s a good question. What we are looking for is 1+1+1+1 equals 6 or 8, instead of just 4. To realise our full potential as a conglomerate and to open up new growth opportunities, our business units need to collaborate even more with one another, capitalising on the wealth of expertise, industry knowledge and networks that they have.

The Sino-Singapore Tianjin Eco-City is a showcase for how we have been able to bring our various business divisions together to create impactful projects. Starting from barren saline and alkaline land in 2008, the Tianjin Eco-City has now become one of the best known green developments in China, with some 50,000 people working and living there.

Other synergies are also emerging through Keppel T&T and Keppel Land’s joint venture to develop data centres, as well as Keppel Land and M1’s partnership to offer smart living solutions at our properties.

Looking ahead, there will be more opportunities for Keppel’s diverse units to link up and participate along critical value chains, be they in the harvesting, transportation and retailing of natural gas or the development of townships and data centres. In all these areas, Keppel Capital can play a part by creating investment opportunities for investors and at the same time pull through projects for our business verticals.

Net Profit by Income Type

How are you preparing the Group to fully capture the synergies and deliver creditable performance across cycles?

With our key verticals firming up well, we can better work the Group’s core strengths in technology and innovation; engineering and project management; operating and maintenance and capital management to create more growth opportunities.

The goal of our business model is to capture value at every step of the way, from the time we create an asset till even after we inject it into a trust or fund that we manage. The ability to improve the overall quality of earnings with more recurring income will help us fund our capital spending and dividends.

Until now, we have been playing more to the left in terms of real estate, infrastructure and investments where the businesses tend to be asset heavy. To offer our customers the best value propositions in line with our aim of generating good returns, we will need to provide higher-value solutions and services to the right of our value chains. We will also have to co-create and collaborate with our customers, suppliers and other stakeholders to stay ahead of the game.

In addition to providing turnkey solutions and services, such as developing homes for sale and building, converting and repairing offshore vessels, which Keppel has been very good at, we can also create quality assets across our business lines to generate stable cash flows for the Group over a longer period.

We can develop office buildings, data centres, power and waste-to-energy plants, as well as midstream assets such as FLNG vessels, and then own, manage and operate them. Operations and maintenance expertise is a key differentiator for Keppel; it not only complements our ability to create quality assets but also generates streams of recurring income for us.

Once our assets have been stabilised and de-risked, we will need to recycle them and reinvest the capital into new projects with higher returns. This is where our asset management units play a key role. As we provide asset management and operations and maintenance services for the assets injected into our business trust and REIT vehicles, we will earn stable, recurring fees to bolster our bottom line. All sources of earnings are important to us, and we will harness them for growth.

Keppel is renowned for being a well-run company. What else are you doing to facilitate growth and make the Group more efficient?

The simplified corporate structure encourages collaboration across our verticals by aligning them to the Group’s objectives and reducing administrative layers and costs. We are looking at further enhancing the way we bring people, processes and technology together to consistently create value.

By putting in place shared services and supporting functions such as IT and human resources, we can optimise the delivery of cost-effective, flexible and reliable services to all units. Not only will we achieve economies of scale from these measures, we will also be able to exercise better governance and share best practices across the Group.

Shared services will add resilience into our ecosystem, enabling our operating units to focus on managing and growing the businesses to become leaders of their respective fields.

Which critical factors will determine Keppel’s future success and enable it to achieve its longer term objectives?

Business is not as usual. To stay on top of our game, we need to be in tune with the significant shifts in the external environment that could spell opportunity or potential disruption to our businesses. International responses to climate change in the wake of COP 21, the digitisation of the global economy, and the rise of millennials in the market place and workforce are just some examples.

We need to stay nimble whilst keeping a watchful eye over these events. Our corporate milestones in the past two years serve to reinforce Keppel’s business verticals and shape market leaders in our Property, Infrastructure and Investments divisions. These are part of our growth plan towards 2020. We are resolved to imbue a spirit of enterprise and culture of innovation that will keep Keppel agile, resilient and future-ready.

Through our business model, we are creating an ecosystem that is robust, scalable and self-sustaining to take Keppel into the future. It will foster a dynamic environment for greater collaboration, innovation and the creation of synergies.

People are the most vital resource that we have in our ecosystem. My leadership team and I are committed to manage succession as well as attract the right talents and develop them to their full potential. In April 2015, we opened the Keppel Leadership Institute, our very own global leadership development centre to groom leaders and equip them to drive and support the long term growth of our businesses.

We will continue providing more opportunities for our talents to grow in their careers across geographies, industries and functions. Ultimately, we need them to espouse the same passion and core values that orientate us towards the true North. Last year, we also introduced a set of operating principles to guide us in running and providing stewardship for our many businesses.

The world is changing continuously and so must we. Even as we strive do well, we must also do good, holding ourselves to the highest ethical standards, and creating enduring, positive social impact wherever we plant our flag. I am confident that we can take advantage of the downturn to transform Keppel into an even stronger company, creating and sustaining value for generations to come. This is our time.