Keppel — a business in transition
Keppel is one of Singapore’s well-known conglomerate. It started off as a ship repair company that was corporatized in late 1960s from the Port of Singapore Authority. It then ventured into the offshore rig-building business in the 70s, a business that contributed disproportionately to the group’s revenues and profitability today.
A look at the company’s financials and strategy below to see if the stock is worth owning.
Top-line revenue grew in 2019, but experienced negative growth in 2020. Taking a step back, revenues have been decelerating since 2016. On a CAGR basis, between 2016 to 2020, revenue has been growing at -0.7%. Operating profit, between 2016 to 2020, has been growing at a -17% CAGR. ROE has grown at an average of 4.5% between 2016 to 2020. Net gearing ratio has increased from 56% in 2016 to 91% in 2020(almost double) driven by increased liabilities. Operating cash flow has turned sharply negative in 2019 from slight positive in 2018. 2020 also registered a modestly positive operating cash flow.
The financials tell of a business not even growing significantly on a top-line revenue basis, with a cost structure that is eating heavily into profitability. Further, the cash flows indicate a volatile business nature and the doubling of gearing indicate a business with significantly deteriorating financial health.
This is understandable given the majority of the business is derived from the offshore and marine (O&M) vertical. The O&M industry has been experiencing massive headwinds in the past decade, from environmental concerns to slowing petrol demand and dropping crude prices. The recently elevated crude prices is not expected to last beyond Q2 2022 as supply chain issues ease, demand normalizes and higher production comes into the market.
Keppel’s management recognize these challenges and have embarked on plan for the next decade to restructure and reposition the the company for the future. It is looking to exit the rig building business, divesting logistics vertical and monetizing assets to reinvest in growth areas. It has identified core business segments to focus on — renewable energy, residential property development, urban development solutions, data center solutions, 5G connectivity, infrastructure and asset management.
These are generally the right direction for the company to head towards, given its history and competencies and the market demand for these future-centric solutions will be strong. Keppel is also a big Singapore company with a strong brand and even stronger government links and backing. Notwithstanding, investor should still wait to see how Keppel implement its Vision 2030. While the strategy may be solid, the success of the company will depend on its execution. These are growth areas but also relatively new areas for Keppel to build its competency and strong record in.
The stock price has remain range-bound for much of 2021. If I am building my portfolio, I would not add this stock. Not now, at least.
