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Global operations
The Offshore & Marine Division’s “Near Market, Near
Customer” strategy is bolstered by a global network of 17 shipyards
in Asia-Pacific, Gulf of Mexico, Brazil, the Caspian Sea, Middle
East and Europe. The strategic locations of the Offshore & Marine
Division’s global network of shipyards offer unparalleled services
with fast turnaround time. For the year 2006, 95% of the Offshore
& Marine Division’s revenue was derived from its overseas
customers.
The Property Division has landed housing, townships and resort
homes development in various parts of Asia, including China, Indonesia
and Vietnam. Property Division’s expansion into the Indian
market two years ago saw the launch of its condominium development
in Bangalore. Overseas sales continued to progress as it expands
its product range in the global market.
The Infrastructure Division is also growing its overseas footprint,
making inroads into the Middle East and globally – the latest
being the commencement of the commercial operation of power barges
in Ecuador at the end of the year. The $1.7 billion Qatar project
clinched in 2006 is expected to commence construction in 2007 and
contribute meaningfully to the Group.
Singapore Petroleum Company (SPC), part of Investments, is a regional
oil and gas company operating mainly in Singapore but invests in
upstream assets in Vietnam, Indonesia, Cambodia and Australia. This
is in line with its plan to grow its exploration and production
(E&P) business through asset acquisition. While MobileOne (M1)
operates and derives its revenue primarily in Singapore, k1 Ventures’
investments are largely within the US.
Prospects
For the current year, the Group expects continued growth in the
Offshore & Marine and Property Divisions. Infrastructure Division
is expected to return to profitability. The 33% year-on-year growth
in Group earnings for 2006 was exceptional. With a higher earnings
base, a more modest double-digit growth rate is expected for the
current year.
The Offshore & Marine Division secured a record $7.3 billion
of new orders in 2006, bringing the net order book at the end of
the year to $10.5 billion. The outlook for the drilling industry
remains good. Demand for most types of rigs and other related segments
is strong and availability is tight. There is also a growing need
for more deepwater equipment and floating production solutions as
more E&P move into deeper waters. The Offshore & Marine
Division with its suite of proprietary designs and expertise in
project execution is poised to benefit from the growing demand.
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The outlook for SPC remains positive in the light of International Monetary
Fund’s GDP global growth forecast of 5% for 2007. Asian economic
growth is expected to continue. As regional demand for refined petroleum
products is expected to remain robust and coupled with the projected tight
refining capacity, refining margins are expected to be healthy.
The prices of private residential homes in Singapore rose by an estimated
10% in 2006, the fastest rate of growth since 1999. Home prices are generally
expected to rise in 2007 and the residential market to remain buoyant
and active. Capitalising on the good demand for premier waterfront residences,
the group will launch the second phase of its waterfront precinct called
Reflections at Keppel Bay in April 2007. The group’s stable of prime
investment buildings in the Central Business District (CBD) and New Downtown
is expected to benefit from the tight office supply market in Singapore.
The outlook for Asia’s housing market remains favourable on the
back of strong economic growth, rising homeownership trends and continuing
inflow of global funds into Asian real estate. The Property Division will
further strengthen its housing and township development initiatives in
the region and progressively launch its projects in China, India, Vietnam
and Indonesia.
The Infrastructure Division has made steady progress in its projects
both domestically and globally. The power barges re-commenced operation
in December 2006. The NEWater plant started operations in 1Q 2007, while
the Cogen power plant will commence operations in 1H 2007. These new projects
together with the existing Infrastructure businesses should return the
Division to profitability.
ROE and dividend per share
Return on equity (ROE) was 19.1%, compared to 16.4% achieved last year.
This was a new benchmark reached, reflecting our effort to pursue higher
returns for our shareholders.
For 2006, shareholders will be rewarded with dividend of 28 cents per
share, and capital distribution of 28 cents per share. The total payout
of 56 cents per share is higher than the 46 cents distributed in 2005
and 40 cents distributed in 2004. This distribution of approximately $397
million represents 53% of our PATMI, and is equivalent to a gross yield
of 4% on the Company’s volume weighted average share price for 2006.
The distribution to shareholders is paid on account of increased profitability
and strong operational cashflow. We are committed to reward shareholders
with generous payouts as we achieve healthy year-on-year improvement in
earnings growth.
Note:
- 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 plus interest-bearing liabilities,
provisions and present value of operating leases.
- Weighted Average Cost of Capital is calculated
in accordance with Keppel Group EVA Policy as follows:
(a) Cost of Equity using Capital Asset Pricing Model with market risk
premium set at 6% (2005: 6%);
(b) Risk-free rate of 3.282% (2005: 2.737%) based on yield-to-maturity
of Singapore Government 10-year Bonds;
(c) Unlevered beta at 0.63 (2005: 0.63); and
(d) Pre-tax Cost of Debt at 3.72% (2005: 3.07%) using 5-year Singapore
Dollar Swap Offer Rate plus 75 basis points.
Since 2004, we continue to maintain a positive EVA, achieving an amount
of $423 million in 2006. The vastly improved EVA is more than double the
amount achieved last year.
This positive EVA creation was the result of our improvement in NOPAT,
coupled with an efficient capital structure, stringent investment criteria
and strong cashflow.
Our NOPAT improved due to increase in profit after tax and exceptional
items of $215 million. This is partially offset by the larger Capital
Charge due to a higher Weighted Average Cost of Capital (WACC) of 6.5%
compared to the previous 5.97%, and increase in Average EVA Capital by
$239 million. WACC was higher mainly due to increase in risk-free rate
and higher cost of debt. Average EVA Capital is higher at $9.08 billion
compared to $8.84 billion largely due to development expenditure on Property
and Infrastructure projects.
The Group has achieved a total EVA growth of $388 million over the last
two years.
Total Shareholder Return (TSR)
The Group is committed to deliver value to its shareholders as it strives
to grow its earnings. The Group continues to identify, develop and build
growth platforms for its businesses, sharpen its strategic focus while
streamlining its businesses, launch new products, strengthen its customer
relationships and penetrate new markets.
In 2006, Keppel Corporation’s TSR was 65.3%, more than double the
benchmark Straits Times Index (STI)’s TSR of 32.5%. Over the past
five years, Keppel Corporation’s CAGR TSR of 51% was also significantly
higher than STI’s TSR of 18%. The yearly TSR of Keppel Corporation
has outperformed that of STI for the past seven years.
Net cash from operating activities was $1,854 million compared to $1,559
million in 2005 and $530 million in 2004. This was mainly contributed
by the increased operating profit and positive working capital changes,
especially from progress payments received for contracts.
Net cash used in investing activities was $374 million. The Group spent
$759 million on acquisitions, expenditure on infrastructure projects and
operational capex. This comprised principally acquisition of additional
shares in Evergro Properties Limited, Keppel Philippines Marine, Inc,
D.L. Properties Ltd, SPC and M1, further investment in One Raffles Quay,
capital expenditure on the cogen plant and other operational capex. Divestment
and dividend income totalled $385 million.
As a result, free cashflow increased from $694 million in the previous
year to $1,480 million in 2006. This is an increase of 113% as compared
to a 19% growth from 2004 to 2005.
During the year, the Group distributed an amount of $410 million to its
shareholders and minorities of its
subsidiaries. The Company’s shareholders received $338 million which
is 17% higher than the $288 million distributed in previous year. This
included the final dividend of 13 cents per share and capital distribution
of 23 cents per share in respect of 2005 and interim dividend of 12 cents
per share in respect of 2006.
Financial position
Total assets of $13.82 billion as at 31 December 2006 were $1.23 billion
or 9.7% higher than the previous year-end. Fixed assets and investment
properties were higher because of expenditure on the cogen plant and acquisition
of D.L. Properties Ltd, which became a subsidiary. The increase in associated
companies was attributed to equity accounting for share of profits and
further investment in SPC, M1 and One Raffles Quay. Long-term investments
were higher as a result of purchase of investments in the current year.
There were more debtors mainly due to the increased activities in the
Offshore & Marine and Infrastructure Divisions.
Shareholders’ funds increased from $3.09 billion as at 31 December
2004 to $3.65 billion as at 2005 year-end, and with a further increase
to $4.21 billion as at 31 December 2006. The increase was mainly attributed
to retained profits for the year and fair value adjustments of financial
assets. This was partly offset by payment of final dividend of 13 cents
per share less tax and capital distribution of 23 cents per share in respect
of financial year 2005, and interim dividend of 12 cents per share less
tax in respect of the first half year ended 30 June 2006.
Minority interests of $1.39 billion in 2006 were slightly higher than
minority interests of $1.29 billion in 2005 and $1.17 billion in 2004
because of the retained profits of non wholly-owned subsidiaries.
Total liabilities of $8.22 billion at 31 December 2006 were $564 million
or 7.4% higher than the previous year. Creditors were higher because of
the higher level of activities in the Offshore & Marine Division.
Billings on work-in-progress in excess of related costs increased due
to progress billings received from Offshore & Marine’s contracts.
Amount due to associated companies decreased due to repayment of advances.
Borrowings at $2.96 billion were a reduction of $774 million from $3.73
billion at the previous year-end because of strong operational cashflow
from the Offshore & Marine and Property Divisions.
Borrowings
The Group borrows from local and foreign banks in the form of short-term
and long-term loans, project loans and bonds. At the end of 2006, 23%
of Group borrowings were repayable within one year with the balance largely
payable between two and five years. The reduction to 23% in the proportion
of short-term borrowings from 54% in 2004 and further reduction to 36%
in 2005 was because of re-financing of term loans and strong operational
cashflow.
Unsecured borrowings constituted 38% (2005: 60% and 2004: 73%) of total
borrowings with the balance secured by properties and assets. Secured
borrowings are mainly for financing investment properties and project
financing loans for property and development projects. The net book value
of properties and assets pledged/mortgaged to financial institutions amounted
to $1.19 billion (2005: $1.07 billion and 2004: $1.16 billion).
Fixed rate borrowings constituted 16% (2005: 8% and 2004: 15%) of total
borrowings with the balance at floating rates. The Group has interest
rate swap agreements with notional amount totalling $732 million whereby
it receives variable rates equal to SIBOR and pays fixed rates of between
2.33% and 3.14% on the notional amount. The Group also has interest rate
cap agreements to hedge the interest rate risk exposure arising from its
US$ and S$ variable rate term loans. As at the end of the financial year,
the Group has outstanding interest rate cap agreements of $1,065 million.
Details of these derivative instruments are disclosed in the notes to
the financial statements.
Singapore dollar borrowings represented 93% (2005: 73% and 2004: 74%)
and US$ borrowings represented 4% (2005: 24% and 2004: 24%) of total borrowings.
The balances were in Australian, European and other Asian currencies.
Foreign currencies borrowings were drawn to hedge against the Group’s
overseas investments and receivables, which were denominated in foreign
currencies.
Capital structure and financial resources
The Group maintains a strong balance sheet and an efficient capital structure
to maximise return for shareholders. The strong operational cashflow 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 return
on investment, cashflow 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.
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Capital structure
Capital employed at the end of 2006 was $5.6 billion, an increase
of $663 million over 2005 and $1.34 billion over 2004. Net borrowings
stood at $1.34 billion at end of 2006, a further reduction from
$2.32 billion in 2005 and $2.73 billion in 2004. With higher capital
employed and lower borrowings, net gearing was reduced from 0.64
times in 2004 to 0.24 times in 2006.
Interest coverage improved from 7 times in 2004 to 9.9 times in
2006. This is achieved on increasing EBIT despite the escalating
interest costs over the three years.
Cashflow coverage increased significantly from 6.4 times in 2004
to 16.6 times in 2005, followed by a slight decline in 2006 to 16.2
times. In spite of higher interest expense, cashflow coverage remained
healthy due to the robust operating cashflow generated by the Group.
At the AGM in 2006, shareholders gave their approval for mandates
to issue and buy back shares. The Company did not exercise these
mandates.
Financial resources
The Group maintains sufficient cash and cash equivalents, short-term
marketable securities and an adequate amount of standby credit facilities.
Funding of our working capital requirements and capital expenditure/investments
is made through a mix of short-term money market borrowings and
medium/long-term loans.
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Due to the dynamic nature of the Group’s businesses, it maintains
flexibility in funding by ensuring that ample working capital lines are
available at any one time. At the end of 2006, credit facilities in the
form of short-term loans, bank overdrafts, letters of credit, and other
banking facilities provided by major banks to the Group amounted to $4.97
billion of which $0.85 billion was utilised.
Financial risk management
The Group operates globally and is exposed to a variety of financial risks,
including the effect of changes in equity market prices, foreign currency
exchange rates and interest rates. 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 Group Finance Director and
comprises 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 utilises forward foreign currency contracts and other foreign
currency hedging instruments to hedge the Group’s exposures to
specific currency risks relating to investments, receivables, payables
and other commitments;
- 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; and
- The Group maintains flexibility in funding by ensuring that ample
working capital lines are available at any one time; and
The Group adopts stringent procedures on extending credit terms to customers
and the monitoring of credit risk.
Critical accounting policies
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 judgement 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 judgement
are described below.
Impairment of fixed assets
Determining whether fixed asset value is impaired requires an estimation
of the value in use of the cash-generating units. This requires the Group
to estimate the future cashflows expected from the cash-generating units
and an appropriate discount rate in order to calculate the present value
of the future cashflows.
Impairment of goodwill
Determining whether goodwill is impaired requires an estimation of the
value in use of the cash-generating units to which the goodwill is allocated.
This requires the Group to estimate the future cashflows expected from
the cash-generating units and an appropriate discount rate in order to
calculate the present value of the future cashflows.
Impairment of available-for-sale investments
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 financial cashflow.
Revenue recognition
The Group recognises contract revenue based on the stage of completion
method which is measured by reference to the proportion of contract work
completed. Significant assumption is 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 specialists.
Income taxes
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.
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