Keppel Corporation's (KPELF) CEO Loh Chin Hua on Q3 2016 Results - Earnings Call Transcript

| About: Keppel Corporation (KPELF)

Start: 05:30

End: 06:44

Keppel Corporation Ltd (OTCPK:KPELF)

Q3 2016 Earnings Conference Call

October 20, 2016 05:30 AM EST


Loh Chin Hua - CEO

Chan Hon Chew - CFO

Chow Yew Yuen - CEO, Keppel Offshore & Marine

Ang Wee Gee - CEO, Keppel Land


Cheryl Lee - UBS

S.K. Lim - CIMB

Ling Xin Jin - Morgan Stanley

Jacqueline Woo - Singapore Press Holdings

Aradhana Aravindan - Reuters News

Mayuko Tani - Nikkei

Joshua Lee - Deutsche Bank

Lim Siew Khee - CIMB

Wayne Lau - Morgan Stanley

Foo Zhiwei - UOB Kay Hian

Good evening. On behalf of my colleagues on the panel, welcome to the conference and webcast on our results and performance for the third quarter and first nine months of 2016. Global growth remains slow. Weak demand in the advanced economies coupled with the transition to slower, but more sustainable growth in China are also weighing on global trade. Against these headwinds, GDP growth in Singapore has slowed. According to MTI's advance estimates GDP grew by only 0.6% in quarter three compared to the same period a year ago which is the weakest rate of growth since the 2009 global financial crisis.

The landscape for offshore and marine remains very challenging. The big news for the oil and gas sector during the quarter was OPEC's announced deal to cut production. Although still scant on details, the news was welcomed by the oil market and we have seen oil recover to above $50 per barrel. Despite a gradual recovery in oil price, demand in offshore market is expected to remain tepid. Oversupply remains a key concern in the offshore market, worsened by the overhang of rigs still under construction. With priority given to strengthening their balance sheet, the oil majors are expected to continue to hold back on offshore and exploration expenditure.

On a more positive note, we see continuing interests in FPSO conversions and production solutions such as tension-leg platforms and semi-submersibles production units as well as opportunities in the development of specialized vessels. Also resilient amidst the global slowdown are strong urbanization trends, especially in Asia, driving demand for quality homes and offices, infrastructure and connectivity which Keppel is well-poised to meet as a provider of solutions for sustainable urbanization.

Keppel is responding with agility and resilience to the challenging environment, underpinned by our multi-business strategy. Despite the strong headwinds affecting the O&M industry, Keppel O&M has remained profitable. This is actually a very remarkable achievement. Keppel is responding with agility and resilience to the challenging environment underpinned by our multi-business strategy. Other divisions in the Keppel Group continue to bolster our earnings with our property business now the largest contributor, infrastructure providing steady recurring income and our data center and asset management businesses serving as new areas of growth.

Right-sizing of our Keppel O&M business will continue as we prepare for an extended period of weaker demand for new oil rigs. We are not just cutting costs and surviving the downturn in the offshore industry, but are also investing prudently in new capabilities and exploring new markets and opportunities.

Our aim, as always, is to emerge from this downturn stronger. We are looking at repurposing the technology that we have developed in offshore industry for other uses such as floating power plants and floating desalination plants.

We expect that our O&M business will be increasingly diversified beyond just oil and gas. In the short term, painful measures which have kept Keppel O&M profitable despite the sharp drop in revenues and operating profits will have to continue. Reflecting our solidarity as One Keppel, senior management across all the Keppel business units have voluntarily taken a reduction in our monthly salary. The directors of Keppel Corporation will also be proposing lower director’s fees for 2016 at next year’s AGM.

Whilst Keppel remains profitable, the voluntary cuts by directors and senior management demonstrate our determination to hunker down and deal squarely with the challenges we face. It is also the right thing to do given the hard measures we have taken to right size our O&M division and sacrifices that our stakeholders have to make.

For our asset-heavy businesses such as property and infrastructure, our focus is on returns. In seeking higher returns we proactively recycle our capital and co-invest with like-minded partners through platforms such as those in our newly created Keppel Capital. We see strong investor demand for real assets such as data centers, power plants, offices, and waste-to-energy plants and Keppel can partner with investors to develop these assets from greenfield and brownfield. This partnership allows us to more ambitiously grow our infrastructure and property businesses and to capture value in the process without overburdening our balance sheet.

We are also driving collaboration across the Group to harness synergies, capture new business opportunities, and create value for the Group. Later on I will highlight examples of how collaboration within our Group has started to bear fruit. In the first nine months of 2016, our business divisions achieved a net profit of 641 million. This was down 43% year on year mainly due to lower profit contributions from the O&M division. EVA was 39 million, while our annualized ROE was 7.6%. Cash from operating activities has reversed from an outflow of 738 million in the first nine months of 2015 to an inflow of 274 million over the same period this year.

This turnaround has been led by lower working capital requirements for Keppel O&M, better asset turns in our property division, and improving cash inflows from our infrastructure division. Net gearing has reduced slightly from 0.62 as at end June 2016 to 0.57 as at end September 2016.

Let me now take you through the businesses in our Group starting with offshore and marine. In this quarter, Keppel O&M continued to right-size, further reducing its direct workforce by about 3,080. This includes a reduction of around 660 in Singapore and 2,420 in our overseas yards. For the first nine months of the year, Keppel O&M has reduced its direct workforce by close to 8,000 or around 26%. Much of the reduction has so far been through natural attrition. However, we will increasingly also look into early termination of contracts and selective retrenchment in Singapore in line with the drop in workload while ensuring that Keppel O&M continues to retain its core capabilities.

Other parts of the Keppel Group are still growing and are in need of good people, specially those with strong engineering and project management expertise. Where possible, we will look to redeploy displaced talents to other business units within the Group. Apart from reducing variable cost, we have also worked on cutting our overheads which have come down by close to 20% year-on-year in the first nine months of 2016. These efforts together with cost savings achieved on our projects have allowed our operating margins to remain at 11.4% for third quarter 2016, and 12.5% for the nine months of this year despite the lower top line. We are also reviewing our yard capacity in light of declining workload.

The harsh winter in the O&M market will not last forever. We are not just cutting costs to survive the short-term. We are taking advantage of the downturn to restructure Keppel O&M and make the Company leaner, more competitive, and stronger when spring returns.

We are monitoring the political developments and investigations in Brazil, which continue to widen in scope. Earlier this month, we announced that following further internal investigations, Keppel recognize that certain transactions associated with the agent of some Keppel entities in Brazil may be suspicious. Keppel has since notified authorities in the relevant jurisdictions of its intentions to cooperate and work towards the resolution of the underlying issues arising from or in connection with the transactions.

I want to reassure all our stakeholders of Keppel's zero-tolerance stance against any form of illegal activity, including bribery and corruption, involving its employees or associates. The matter is closely under review and we will make further announcements as appropriate.

The O&M division has secured new contracts worth about 500 million year-to-date. Even as we work at optimizing our operations and resources, we remain focused on the timely and effective execution of our order book. Twenty projects were delivered on time and on budget in the nine months of 2016, including nine in the third quarter. Four additional projects are slated for delivery in the last quarter of the year.

While we wait for more clarity on [Indiscernible] plans, we believe that the provision of 230 million taken at the end of 2015 remains appropriate and adequate. We are looking out for opportunities where we can leverage our expertise to service niche adjacent or even new markets. These include production solutions, gas solutions, and specialized vessels, as well as non-oil and gas solutions.

We see a promising future for the LNG market over the long term. The use of LNG as an alternative marine fuel is on the rise as a result of emissions reduction goals set by the International Maritime Organization and the United Nations Climate Change Conference.

Keppel is well-positioned to capture opportunities across the value chain in the growing gas market. We have secured orders for our first two dual-fuel tugs which will be built to Keppel’s award-winning proprietary design. Our joint venture with Shell FueLNG has also secured its first two contracts from Shell to provide bunkering services for Keppel Smit Towage and Maju Maritime’s dual-fuel tugs.

Keppel will leverage its shipbuilding and design capabilities and LNG bunkering services to provide end-to-end solutions for vessel owners turning to LNG as a marine fuel. Keppel O&M through its subsidiary, Gas Technology Development, has also signed an MoU with Shell to jointly explore potential opportunities catering to the demand for LNG as a fuel in coastal areas, inland waterways, and the international marine sectors. Keppel has long been known for our innovative solutions and we will continue to expand our suite of solutions and pursue new opportunities for growth.

Now, to our property division. Keppel Land has been actively implementing our strategy to recycle assets and focus on seeking higher returns. We have achieved divestment proceeds totaling about 530 million year-to-date. Amongst the divestments in this quarter is that of the 80% stake held by Keppel Land China and Alpha Investment Partners in Life Hub [Indiscernible], a successful mixed-use development in Shanghai for US$517 million. Significantly, our stake in Life Hub was divested based on the properties sale value of RMB 5.5 billion, which is close to a 70% premium over the original purchase price of RMB 3.3 billion three years ago. It is an example of the successful collaboration between Keppel Land China and Alpha, which is now under Keppel Capital.

Through innovative asset management and enhancements efforts, we contributed to growing a profitable mall, which enjoys high occupancy with international retailers. This has proven to be an excellent investment for Keppel and also Alpha’s investors. We have achieved an IRR of over 20% per annum without taking any development risk.

Keppel Land is also unlocking value in Sedona Hotel Mandalay, where it has inked a conditional sales and purchase agreement to divest its 100% stake. At the same time, we are seizing opportunities to redeploy our funds and have made investments of about 430 million this year, especially in our key markets in Vietnam and China where we are strengthening our presence.

In Shanghai, Keppel Land China is acquiring a newly completed retail development in the upcoming Jiading District for a total consideration of approximately 102 million. Keppel Land retail management will be its manager and contribute to enhancing the value of the community mall. The examples of the Life Hub in Jiading malls demonstrate how we are building new muscles and shortening time to market. As a property player, we do not have to physically develop all our projects ourselves, but can also selectively acquire and add value to completed projects. This reflects Keppel Land's approach of thinking unbox.

Strengthening our presence in Yangon we are furthering our collaboration with the Shwe Taung Group with a conditional joint venture agreement for 40% stake in developing premium service residences and offices, in the next phase of Junction City. This follows Keppel Land and Shwe Taung's first joint venture to develop Junction City Tower, a grade A office building in Yangon's CBD.

Riding on growing demand for high-quality properties in Vietnam, we have also increased our involvement in prime developments in Ho Chi Minh City's Thu Thiem New Urban area. For the first nine months of this year, Keppel Land sold 3,510 homes. This is 13% higher compared to the same period last year. The total sales value amounted to sum 1.6 billion. Of these, 2,940 homes was sold in China, up 32% year-on-year. In Vietnam we sold 260 homes over the same period including all 135 units of the newly launched Palm Residence in Ho Chi Minh City over one weekend.

In addition, we are launching around 1,500 homes for sale in Vietnam in the fourth quarter of the year. Just over last weekend, we sold 450 homes in Palm Heights, also in Ho Chi Minh City. This new sales are not in our reported nine month numbers.

Despite continuing property market cooling measures, we sold 300 homes in Singapore in the first nine months compared to 155 units sold over the same period last year. We opened the much anticipated Saigon Centre retail mall on 1st August with Takashimaya department store as its anchor tenant. Phase II of Saigon Centre, which also includes 44,000 square meters of premium grade A office space as well as 195 luxury service apartments is expected to be completed in end 2017.

In our residential portfolio, we have a 70,000 strong pipeline, and over 16,000 launch-ready homes from now to end 2018. We aim to increase the inventory turn and launch more homes for sale especially in those markets with favorable conditions. With a land bank comprising more than 10 times the number of homes sold on average each year, we are not under pressure to accumulate land and will only do so if we can get an adequate risk-adjusted return. As we look to turn our inventory more, we can right-size our property book and redeploy the balance sheet space that's freed up for our other growth businesses.

Our objective is not to create the largest land bank or property business, but one that builds good homes, offices and commercial developments sought after by buyers and tenants. Our goal is to keep Keppel Land a developer with one of the highest return on equity in Asia. On the commercial front Keppel Land has over a million square meters of gross floor area under development. These projects will be progressively completed and will contribute to our recurring income and revaluation gains.

I will now move on to our infrastructure business. Keppel Seghers, a wholly owned subsidiary of Keppel Infrastructure, has secured a contract from repeat customer Shenzhen Energy Environment Engineering to provide technology and services to the power and WTE plant in Shenzhen, which will make it the world's largest WTE facility in terms of incineration capacity. The contract win reinforces Keppel's position as the leader among important WTE technology solution providers in China.

We have also completed the handover and commenced the operations and maintenance phase for the solid stream and slush treatment facilities in the Doha North Sewage Treatment Plants. The 10-year operations and maintenance phase of the contract will contribute to stable income streams, while Keppel Infrastructure continues to seek new opportunities to design, build, own and operate its own assets. The mega trends or data traffic, cloud computing and big data, augur well for our data center business. Demand for data centers remains strong in Europe and the Asia-Pacific. This is a business that will continue to grow as Keppel data centers, a joint venture between Keppel T&T and Keppel Land, has firmly established itself as a trusted partner and operator of data centers by the industry.

We will continue to improve the value proposition to our customers by looking into energy efficiency, connectivity, security, and the reliability of our data centers. Earlier this week we announced the Keppel data centers will unlock value with the divestment of 90% of Keppel DC Singapore Tree to Keppel DC REIT for over SGD200 million. This allows Keppel data centers to recycle its capital and provides a valuable dual flow pipeline for unit holders of Keppel DC REIT. Keppel Logistics has just announced the acquisition of a stake in a Singapore based e-commerce fulfillment company, Courex. This is in line with Keppel's plan to grow our logistics division by acquiring complementary capabilities to tap into fast growing market sectors.

Courex cloud-based inventory management platform and crowd sourcing model of managing its delivery fleet will allow Keppel to gain a competitive foothold in the rapidly growing e-commerce space. The acquisition will strengthen our ability to tap the e-commerce sector in Singapore and Southeast Asia. Meanwhile our distribution center in the Sino Singapore Tianjin Eco City began operations in Q3 2016, and will cater to the growing market in northern China.

The creation of Keppel Capital is a critical piece of our business model in how we can pool together like-minded investors to co-fund the development of infrastructure, energy, and property assets from Greenfield and Brownfield. The REITs and trusts under Keppel Capital also form part of a critical ecosystem for capital recycling. It is a symbiotic relationship that we share with unit holders.

As a strong and responsible sponsor, we have aligned our interest squarely with investors by co-investing significantly in the REITs and trusts that we manage. Keppel also provides a steady flow of pipeline assets for growth and has strong operating capabilities in driving value from the assets that we manage. Keppel Capital has recently received the approval from MES to centralize certain regulated activities carried out by its licensed asset managers in addition to the non-regulated activities. This is a significant step in allowing Keppel Capital to fulfill its vision to be a global asset management powerhouse, focus on investing successfully in real assets. With the latest approval Keppel Capital can strive for better operating efficiencies and provide more varied and complete career opportunities for its investment and asset management professionals.

Keeping investors' interest at heart and making sure that any conflicts are properly managed will remain a key part of Keppel Capital's DNA and processes. Drawing on the Group's strengths, Keppel capital will connect financial investors with high quality real assets in the energy, infrastructure, and property spaces whilst creating pull through opportunities for our business verticals.

We are encouraged by positive feedback from both existing and prospective investors, many of whom are large pension and sovereign wealth funds, seeking alternatives investments with steady, predictable cash flows. We announced in the last quarter that Keppel Capital launched a new data center fund and a property fund through Alpha Investment Partners with a combined target size of $1.5 billion.

I'm pleased to update you that the Alpha Asia Macro Trends Fund III has made its first acquisition of an office building in Tokyo. Meanwhile the Alpha Data Centre Fund set up in collaboration with Keppel T&T is closed to making its maiden acquisition. When fully invested, the new -- two new private funds will add as much as US$3.5 billion to Keppel’s total assets under management.

Our asset managers of the public listed REITs and trusts have also made good progress. Keppel DC REIT’s portfolio of quality data centers were expanded by new acquisitions in Italy and the UK in the past three months. Meanwhile Keppel Infrastructure Trust has completed the upgrading of the Senoko WTE plant for the National Environment Agency ahead of schedule and on budget, thus improving the operating cash flow from the plant.

Our strategic moves and rightsizing efforts ensure that the Group remain resilient and nimble in a phase of harsh challenges. We will continue to work our asset hard and then recycle them at the right time to earn the best risk-adjusted returns. Gains from revaluation impairments and divestments contributed 91 million or 14% of our earnings in the first nine months of 2016.

These sources of income are an integral part of our business model and we expect them to contribute regularly and meaningfully to our bottom-line. For the first nine months of 2016, recurring income contributed 237 million or 37% of the Group’s total net profits. We are determined to improve the quality of our earnings by growing stable streams of recurring income for the long term.

By hunting as a pack and capitalizing on synergies as One Keppel, I’m confident that we will perform better as a business both in good times and when the going gets tougher. An immediate opportunity for us is to further encourage the flow of goods and services between Keppel companies and associates. Just this month, Keppel Land has begun purchasing renewable energy from Keppel Infrastructure. The power is corporate office at Bugis Junction Towers.

The renewable energy is harvested from photovoltaic panels installed in premises, operated by Keppel Infrastructure, and is then transferred to Keppel Land. There is also potential for Keppel Infrastructure and Keppel Land to offer similar schemes to other office tenants and external customers.

The good returns from the divestment of our stake in Life Hub [Indiscernible] reflect the successful partnership between Keppel Land China and Alpha. The Alpha data center fund, a product of collaboration amongst Alpha, Keppel T&T, and Keppel Land is yet another example of how we can compound value creation as a Group layering our diverse strengths to create wining propositions for customers and investors.

Whilst we have started to see some fruits from collaborating and unleashing synergies across our business units, the potential to do even more is there. We are only just beginning.

I shall now invite our CFO, Hon Chew, to take you through the Group’s financial performance. Thank you.

Chan Hon Chew

Thank you, Chin Hua. A very good evening to all. I shall take you through the Group's performance for the third quarter of 2016. The Group recorded a net profit of SGD225 million this quarter, which was 38% below the same quarter last year. Earnings per share was correspondingly 38% lower at SGD0.124, our EVA was at [SGD13 million]. The Group's revenue for the third quarter was 40% or SGD981 million lower than the same quarter last year. All divisions except property division recorded lower revenue during the quarter.

Operating profit at SGD185 million was 50% or SGD186 million lower as compared to the same quarter in 2015. This was due mainly to lower profits from the offshore and marine property and infrastructure divisions.

Profit before tax decreased by a small extent of 39% to SGD286 million, arising from higher contribution from associated companies, which includes the gain from the sale of Life Hub @ Jinqiao in Shanghai. Correspondingly, net profit after tax and non-controlling interest for the third quarter was lower by 38% or SGD138 million. Similarly, earnings per share decreased 38% to SGD0.124. Overall, the Group's revenue was 40% lower than the same quarter last year, driven largely by the 63% decline in the offshore and marine division as a result of lower volume of work, deferment of some projects, and suspension of the Sete Brasil contracts.

Infrastructure division recorded lower revenue as well, due mainly to lower prices and volume from power and gas business. This was partially offset by a 4% growth in property division's revenue, primarily due to higher revenue from residential projects, such as The Glades and the Highline Residences in Singapore, and waterfront residence in Tianjin. Offshore and marine division's pre-tax profit fell from SGD206 million to SDG22 million, a steep 89% or SGD184 million decline from the same quarter last year. This was driven by the 63% drop in revenues, as well as a SGD10 million impairment provision for plant and machinery.

Despite the sharp 63% fall in revenues, the division did well to achieve an operating margin of 11.4%, less than 1 percentage point lower than the 12.3% margin in the same quarter last year. The ongoing right-sizing exercise, which started more than a year ago, contained the erosion of its margins in the third quarter. Property division's pre-tax profit increased by 9% or SGD17 million, due mainly to higher share of profit from associated companies arising from the divestment of our stake in Life Hub @ Jinqiao in Shanghai, as part of the continuing process of recycling capital to earn higher returns. Investments division's pre-tax profit decreased by 40%, mainly as a result of share of losses from KrisEnergy and lower share of profits from k1 Ventures. After tax and non-controlling interest, the Group net profit in the third quarter decreased by 38% or SGD138 million to SGD225 million as compared to the same period last year, with property division being the top contributor to the Group's earnings at 70%, followed by infrastructure at 17%.

Next, I shall take you through the performance for the first nine months of 2016. Net profit for the first nine months of 2016 was down 43% from the same period last year to 641 million, earnings per share also decreased by the same extent to [35.3].

Annualized ROE declined to 7.6%, while EVA was lower at 39 million. Free cash inflow was 552 million as compared to an outflow of 784 million in the prior year, due mainly to slow down in working capital increases and lower operational capital expenditure from offshore and marine and property divisions.

Net gearing increased by 4% from 53% at the end of 2015 to 57%. However, in comparison to second quarter of 2016, net gearing was deceased by 5 percentage point from 26%. This was due mainly to proceeds from recycling of assets, such as the divestment of our stake in Life Hub @ Jinqiao, proceeds from sale of development projects, and the receipt of retention monies from our EPC project in Qatar. In the first nine months of 2016, the Group earned total revenue of 4.8 billion, a 38% or 3 billion decrease from the same period last year. All divisions except for property division recorded lower revenues.

Operating profit at 697 million was 41% or 486 million lower than the same period last year. The decrease is led by lower profit from offshore and marine and infrastructure. Operating profit from property was lower due to absence of write-back of excess cost accruals. Pre-tax profit correspondingly decreased by 40% or 574 million, due mainly to lower operating profit, share of losses from KrisEnergy, and lower share of profits from other associated companies, and higher net interest expense partially offset by share of profit from the sale of Life Hub @ Jinqiao.

After tax and non-controlling interests, net profit was 43% or 479 million lower at 641 million. Similarly, earnings per share decreased by 43% to [35.3]. Overall, the Group's revenue of 4.8 billion was 38% lower from last year, led mainly by 58% decrease in the offshore and marine revenue, resulting from lower volume of work, deferment of some projects, and suspension of Sete Brasil contracts. Property revenue increased by 24% to 1.5 billion as compared to the same period last year, led by higher revenue from residential projects such as 8 Park Avenue in Shanghai and The Glades in Singapore. Infrastructures revenue decreased by 22%, attributed mainly to lower prices and volume from the power and gas business.

The Group recorded a pre-tax profit of 849 million for the first nine months of the year, 40% or 574 million lower than 2015. The offshore and marines division's pre-tax profit was 66% or 446 million lower as a result of lower revenue and higher interest expense. The division's operating margin for the first nine months at 12.8% was at about the same level as last year. In the property division pre-tax profit increased by 14% or 56 million, due mainly to higher contributions from associated companies as a result of gain from disposal of Life Hub @ Jinqiao, and gain from Keppel REIT's divestment of office tower at 77 King Street in Sydney, Australia.

Infrastructure’s pre-tax profit was lower by 48% or 88 million, due mainly to divestment gains recognized in the same period last year.

As mentioned last quarter, the division’s profits in 2015 were boosted by gains from the divestment of 51% interest in Keppel Merlimau Cogen Private Limited and dilution re-measurement gains from the combination of Keppel Infrastructure Trust and CitySpring Infrastructure Trust partially offset by the provision of losses on the Doha North Sewage Treatment Plant.

Investment division’s pre-tax profit decreased by 62% or 96 million due to share of losses from KrisEnergy and lower share of profit from k1 Ventures. The division’s pre-tax profit included 51 million from Keppel Capital's fund management business. After tax and non-controlling interest, the Group’s earnings decreased 43% or 479 million to 641 million, with property division being the top contributor at 55% followed by offshore and marine division at 26%.

Amidst poor market environment, especially in the offshore and marine sector, the Group recorded a creditable net profit of 641 million for the first nine months of the year. The third quarter 2016 results remain comparable to each of the first two quarters of the year on a quarter-on-quarter basis. This translated to earnings per share of 0.353 which was 43% lower than the corresponding period in 2015.

In the first nine months of 2016, operational cash inflow was 885 million, 167 million below the previous period. Outflow for working capital changes, interest, and income taxes was 611 million, which is significantly less than the outflow of 1.79 billion in the prior period. This was driven mainly by the cash proceeds from sale of development properties and the slowdown in working capital increases in offshore and marine division. This resulted in the net cash inflow from operating activities of 274 million as compared to the outflow of 738 million in the same period last year.

Net cash generated from the investing activities amounted to 278 million comprising mainly investments and dividend income of 360 million less investments and operational capital expenditure of 97 million. As a result there was an overall cash inflow of 552 million for the first nine months of 2016 as compared to the cash outflow of 784 million in the same period last year.

The Group remains committed to our multi-business strategy as we harness the strength of our core competencies to stay responsive to the changes in the macro environment. We are also focused on capturing greater efficiency by controlling our costs so as to build resilience for the future into our businesses and stay at a cost in creating value for our stakeholders in the long term. Thank you.

Loh Chin Hua

Thank you, Hon Chew. We are ready to take questions over the web.

Question-and-Answer Session


Okay, the first question comes from Cheryl Lee of UBS in Singapore.

Cheryl Lee

Good evening. On offshore and marine, why was there a loss in associates in the third quarter? Also why was the tax rate for offshore higher in third quarter? Thank you. Can I ask Hon Chew?

Chan Hon Chew

On the first question regarding associates, during the third quarter, some of the associates did not do as well, in particular Floatel. As you know Floatel is -- has a fleet of floating accommodation units, some of them were actually undergoing repairs and some were in between charters. So as a result their performance for the quarter was lower compared to last year. The other question on tax, well, the main reason for the higher effective tax rate is really because there were actually contribution -- higher contribution coming from overseas operations which has actually higher tax rates.

Loh Chin Hua

Okay. Next question is from [Nicholas], who is an investor in Singapore. Good day, Mr. Loh. I noticed in this year's AGM as well as second quarter webcast, you mentioned dividends are at a level that is sustainable. Can I clarify if this sustainability you are referring to is on a payout ratio or the amount of dividends to be paid out?

Well, Nicholas, I think the point that I made at the AGM just to make sure that you have quoted me correctly, is that dividends must be sustainable. So whatever dividends that we declare, it must be on the basis that looking at the Group's need for cash, looking at the growth opportunities that we have and the businesses that we are in, that the dividends that we declare and the Board, rather the Board declares for the shareholders to approve must be at a level that is believe sustainable. We do not have a explicit dividend policy, but we have so far paid out about between 40% to 50% of the earnings.

Can we have the next question? Okay, this question is from [Lou Peh Haan] of OCBC Investment Research in Singapore. Thanks for the briefing. Can you provide a break-down for the SGD34.5 million impairment of fixed assets in the quarter? Did infrastructure account for SGD24.5 million and O&M account for $10 million of the total amount and what are the reasons behind the impairment? Can I ask Hon Chew?

Chan Hon Chew

Yes. The total impairment of fixed assets as disclosed in our SGXnet is SGD34.5 billion of which SGD24.5 billion is actually coming from the infrastructure division. In particular, this -- under KTT's buildings in China in the logistics business. And then for the other SGD10 million is in respect of some plant and equipment under offshore and marine.

Loh Chin Hua

Okay, this question, questions submitted by Gerald Wong of Credit Suisse Singapore. Thank you for taking my questions. There was a SGD35 million impairment of fixed assets in the infra and O&M divisions. Could you provide more details? I think that has been done.

Second question from Gerald is property TBT was lower year on year excluding the gain from disposal of Life Hub @ Jinqiao. Why might this be the case given strong sales momentums in the last few quarters? [Technical Difficulty] In fact I think I mentioned in my remarks that we have sold about 1.6 billion so far this year. But the units that are sold overseas are only recognized when they're completed. So they have not hit our numbers yet although we have sold them and we might have even collected deposits and progress payments.

Cheryl Lee

Could you provide your thought process on the review of yard capacity, and when might such decisions be taken?

Chow Yew Yuen

In the right-sizing exercise that we have been going through for the last 18, 19 months, we have left no stone unturned. As you know with the lower revenue, the yard capacity, there are excess capacity. So what we have been doing is to take a look at all our yards and where we can reduce the capacity, I think that's what we have done. There will be some yards that we are thinking of mothballing, and we are still in the process of making such decision and we will make it known when the decision is taken.

S.K. Lim

Thank you YY. This is question -- there are two questions from S.K. Lim of CIMB in Singapore. The first question, the assets that you impaired in O&M, which country are they from?

I don't think we are at a liberty to disclose, but this is got to do as you have heard from CFO, is related to plant and equipment. Okay. The second question is what were the O&M contracts that have been deferred I guess in the third quarter, I think the answer is, YY?

Chow Yew Yuen

Well, in the third quarter there is no deferment, so we are still on track to deliver four more projects this year, in the fourth quarter.

Ling Xin Jin

Okay, thank you. This question is from Ling Xin Jin of Morgan Stanley, Singapore. Could you share how KrisEnergy is accounted for and is there a potential need for write-down due to it's lower recoverable value? Can I ask…

Chan Hon Chew

KrisEnergy is actually an associate company, so we equity account for KrisEnergy's P&L. What I mean by that is we take our percentage share, proportionate share of the P&L. Given that KrisEnergy is a listed entity there is a one quarter time lag. In other words, the third quarter announcement has taken into account up to KrisEnergy's second quarter results. Now, as for your question on potential need for write-down, well, every quarter we do a review of the value of our investment in KrisEnergy, so, yes, again done so in three quarter together with the audit committee and the conclusion at third quarter is there's no need for writing down, but of course we continue to monitor this and this will be reviewed again at the year end.

Cheryl Lee

Okay, this question is submitted by Cheryl Lee of UBS Singapore regarding property. What percentage of third Q revenue was from Singapore and what percentage from overseas? Also, what percentage of third Q property revenue related to development of residential units?

Chan Hon Chew

I think I'll touch on the first part of the question regarding the revenue of property, how much is coming from overseas, it’s actually 56% coming from overseas. That’s in the segment report on page 39 of the slides. Second question?

Cheryl Lee

What percentage of third Q related to residential units? I think most of it is -- I would think most of it is -- most of that should be residential units, am I correct?

Chan Hon Chew

I think if you look at the slides that CEO presented earlier on of the net profit of 351 million, property trading is actually 192 million and property investments is 105 million and the contribution from the REITs is 58 million. So that’s the composition.

Cheryl Lee

What slide is that?

Chan Hon Chew

This is slide number 12. Okay, Cheryl referred to slide number 12. Thank you.

Jacqueline Woo

Okay, this question is submitted from Jacqueline Woo of Singapore Press Holdings. How much of a salary or fee cut will directors and senior management be taking? I think this is something that is -- well, at least for the salaries is private. I think the fee proposal will -- you can wait until the next year’s AGM, you can find out. But I think the key point here is that this is -- the way we have gone about is that of course the KOM site which is facing the harshest headwinds, most of the senior management team there will take a bigger -- badder burden of the cut and that’s one principle.

Chan Hon Chew

So I think the rest of the business units, especially when they are doing well, this is really more of a solidarity, and then within the business unit or within the Group, the most senior officer will always take the biggest cut. And bear in mind also is that our salary structure is quite has a lot of variables component so as the businesses do well or don’t do so well, there’s a lot of flexibility and the total compensation will respond accordingly.

Aradhana Aravindan

Okay, this question is from Aradhana Aravindan of Reuters News, Singapore. Have there been any new requests for project deferrals this quarter? Have there been any cancellations? Answer is no.

Second question on the broader Singapore economy there has been a string of weak data over the last few days. Sitting in the CEO’s chair of a large Singapore company what does your outlook for the local economy look like over the next year?

Chan Hon Chew

Well, I don’t really want to comment on the overall economy. I think clearly for Keppel we are facing strong headwinds in a number of our businesses, but we remain very optimistic in the medium, the long term I think so long as we can continue to re-look at how we can capture value, I think at least for Keppel, the future ahead is very bright despite the headwinds that we're currently facing and I'm sure in a kind of parallel way, I think Singapore is also going through these challenges and I'm sure the future will be very bright for the Singapore economy in the long term.

This question is from Mayuko Tani of Nikkei, Singapore. Hi, thank you for taking my question. On the suspicious transactions associated with Zwi Skornicki in Brazil, would you please give us an idea why it took some time before you found out it could be suspicious and how did you come to the change of the view? The managements denied, the management denied the media report that a senior management of Keppel O&M knew about it, is there a possibility that you may need to change this statement as well?

Well, this so-called Lava Jato investigation in Brazil is quite wide-ranging. As we have stated in a statement, our investigation, internal investigation is ongoing has been ongoing and as we found some transactions that we believe to be suspicious we have stated that and we have started to look at working with the relevant authorities. As this matter is still under investigation I can't really say much more than that. At the appropriate time, as I've said in my remarks, if there's something to announce, we will announce.

This is a question from Anita Gabriel of Business Singapore, Business Times, okay, of Business Times, Singapore, sorry. At this point, is it still the Company's stance that a provision of SGD230 million for the fourth quarter of 2015 for the Brazil project is adequate?

As I've stated in my remarks, at this point in time we believe it's appropriate and adequate. I think we've said this on past webcast that this is something that we will constantly evaluate at every quarter and this is not just done by management, but working in conjunction with our auditors as well as our audit committees both at Keppel Offshore Marine as well as at Keppel Corp, and as at the third quarter, end of third quarter, we believe this provision to be adequate.

A follow-up question from Gerald Wong of Credit Suisse. Question, he has two questions, two or three questions. First question, can you provide an update on the CAN-DO drillship? Second question, can you provide an update on the second and third FLNG conversion by Golar, what has been the feedback to Golar Hilli, and what is holding back the notification to proceed? Can I ask YY?

Chow Yew Yuen

Yes. Well, the CAN-DO drillship is ongoing and work-in-progress. I can report that it is going well. As you know CAN-DO drillship is a speculative build by ourselves, so I think we are timing it for the market. So I think in that sense we are looking at the -- timing it in such a way that the project by the time it comes out we'll be able to meet the market requirements. The second question is could you provide an update on the second and third FLNG conversion by Golar, the second unit, I think right now we are targeting it for Equatorial Guinea, so I think there's a lot of discussion going on right now. But I think when the time is where we can sign the contract I think we will make the announcement. For the third FLNG, there are lot of inquires in different part of the world, so I think we will also announce when something more concrete will surface. For the next question, what have been the feedback to Golar Hilli, and what is holding back the notification to proceed. Actually Golar Hilli is confirmed. In fact, their project is already fully financed. So Golar Hilli is actually on track for delivery sometime in mid of next year.

Mayuko Tani

Okay, this is question from Mayuko Tani, Nikkei, Singapore. To follow up the pay cut question, how much will be the total savings for the Group from the salary and fee cut?

Chow Yew Yuen

I think, as I said, our compensation is not just based on base salary, so it's just one component of our total comp. And the salary pay cut is really a show of solidarity with the Group and also to reflect the understanding of the hardship that our stakeholders are going through, particularly those on the offshore marine side. And overall, fee, salaries compensation will be tied very much to how we as a Group perform. So that as I said earlier, there's a lot of levers and our variable component will naturally adjust accordingly. Thank you.

Joshua Lee

Okay, this question is from Joshua Lee, Deutsche Bank, Singapore. Good evening. Could you help us understand what is Keppel Land's strategy in Myanmar? There has been a slew of M&A, especially in Keppel Land. Any possibilities of divestment in KOM and what conditions?

I think the first question I'll ask Wee Gee. Can you please address that?

Ang Wee Gee

Hi Joshua thanks for the question. Keppel Land has been operating in Myanmar for more than 20 years now. So over the last 20 years we have built up a strong network relationship in the country. We have built our reputation. We have a strong team of staff operating there. So we are in a very good position to capitalize on the opportunities in Myanmar to invest further. So currently we would consider Myanmar as a country with huge potential and will be monitoring the market very closely, and where opportunities open up we will be keen to invest further in Myanmar.

Loh Chin Hua

I think the second question, I'm not sure how it's related to Myanmar, because KOM has currently no exposure in Myanmar, but I just want to add that KOM is a very important and core business to Keppel. As we review our business, as we right size, if there are some shipyards or businesses, associates that are deemed to be not part of the overall plan in the long term, so there could be divestments, but other than that the business will likely stay intact.


Okay, next question is from Lim Siew Khee of CIMB.

Lim Siew Khee

On Floatel, are the units in between charter found jobs post third quarter 2016? And for units under repair, when will they return to work? Thanks for the clarification.

Chow Yew Yuen

The unit that is under repair has already gone back to work and for the other unit that we just delivered, the Triumph, it has -- it is going for contract in Australia. So there is work there for the next -- the first contract is for short term, about maybe six months, and then there’s a slightly longer term contract of about a year. So I think all those projects are there. I think there’s only one unit that is currently looking for work.

Q – Lim Siew Khee

Thank you.


Okay, this question -- two questions, comes from Wayne Lau of Morgan Stanley, Singapore.

Wayne Lau

Two questions; question number one, when will property presales be recognized? Are we expecting a lumpy recognition from Keppel? Second question, can you share more about the MoU details with Shell regarding LNG? What will the MoU involve?

Chow Yew Yuen

I think for the first question, I think as I’ve earlier answered, for property projects that are outside Singapore we recognize only on completion of the projects. That means any sales will only be recognized when the project is completed. It’s not ideal, it’s quite lumpy, but I suppose if you have enough projects over time it evens out. But of course, this is a bit different for the Singapore projects which are recognized on progress of construction, progress basis.

Wayne Lau

On the second question, can I ask YY?

Chow Yew Yuen

Yes. Well, the MoU with Shell basically is that Shell is interested in the molecules, in selling the molecules and Keppel is interested in the logistic side of things. So in the bunkering services, in [Indiscernible] services and also FSRU businesses, I think that is where Keppel is able to contribute and Shell is interested in the molecules. So I think this MoU is really for not just Southeast Asia, but also any other part of the world where it makes sense for us to collaborate.


Okay, this question is from [Koni Puc] of Bloomberg, Singapore.

Unidentified Analyst

Hello, Mr. Loh. Is there need to cut more jobs in the fourth quarter? How do you see 2017 shaping up for Keppel?

Unidentified Company Representative

Well, as I’ve alluded to in my remarks earlier, the rightsizing for KOM has yielded in very difficult times quite credible -- creditable results in the sense that we are still making money whereas many of our peers in the industry is not doing as well. But given that our expectations are that the market is going to be -- continue to be slow for the foreseeable future, we have to continue to right-size. And we have been relying on natural attrition up to now. So going forward, as I said in my remarks, we have to look at ending contracts a bit earlier and may be even possibly looking at retrenchment. But this is, I can't tell you more than that because we don't have anything concrete that we can share at this point in time.

I think 2017 we believe that, as I said earlier, offshore marine is still continue -- will continue to be quite challenging. I think for our other businesses, we are seeing a growth in businesses like data centers and also for Keppel Capital. And I think the property side we're doing as well as we can. I think you've heard Wee Gee said at the first-half results we expect to sell more units this year compared to last year. How would next year shape up? Very hard for us to say. Depends on the economy, depends on policies. So we are hopeful for a brighter 2017, but we are actually quite in a posture where we're prepared that things may get -- may not get as -- will continue to stay quite tough for -- as we've seen in 2016.

Okay, this is from Ms. Lim from CIMB. Apologies for the piecemeal questions. It's quite okay. When is the new delivery date of Grupo R? Which quarter in 2017? Which month are you targeting to deliver the rig for Falcon? YY?

Chow Yew Yuen

Well, we don't really give break-down by quarters, but I think we are now planning for Grupo R's rigs to be delivered in towards the end of 2017. And Falcon, we are still planning to deliver the Falcon rig for this year and I think Falcon is actually in active conversation with potential customers, and I -- but at this point in time we are still planning for delivery of Falcon by this year.

Loh Chin Hua

Okay, question from Anita Gabriel of Business Times. To what extent would Keppel Corp lend a helping hand to KrisEnergy, which is facing its fair share of challenges and has flagged that it could have problems meeting some of its debt covenants?

As you have heard from CFO, KrisEnergy is an associate, is an investment that we have made. It is a listed company. I think you will have -- they will have plans to try and solve the challenges that they face. I think as a shareholder we will have to look at those plans and make a decision at that point in time.

Foo Zhiwei

Okay, this question is from Foo Zhiwei of UOB Kay Hian in Singapore. Thank you for taking my question. Looking at your residential launch readiness on Slides 54 and 55, it appears that you have scaled back residential launches by 10% to 30% in areas like Chung Ying, Chun Thu, Shenyang, Tongshan, and Kunming in 2017. You have also scaled back launch readiness by 20% in Vietnam. Could you comment on why this is so? Wee Gee?

Ang Wee Gee

I think the question specifically on the cities, one of the factor could be some of the projects we have in these cities are coming to an end. So when it comes to the future launches, the numbers will be lower because we're selling out the project. But these numbers that we provide in the slides are basically indicative numbers. Of course, these numbers doesn't take into consideration the projects that we may secure in the coming months, in the coming years. So the number will be adjusted accordingly. And we have a land bank of 70,000 units outside of Singapore. We will be monitoring the market very closely and if market conditions are favorable and attractive, we will be launching more units over the next several years.

Loh Chin Hua

Well, looks like that's all the questions that we have. Thank you so much for attending this webcast. Thank you.

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