Sunday, 2 August 2015

Keppel Corp – How Much Do You Know About Her O&M Businesses?

Disclaimer: I do not own any shares of Keppel Corp at time of writing!

Price at 52 Weeks Low

Keppel Corp is a hot topic lately, because its share price has dived to 52wks low of S$7.50. If you invested almost a year ago, it will cost you S$11.50 per share. In absolute terms, it means your S$10K invested will become approx. S$6.8K equivalent to a loss of S$3.2k.

The price slide is largely attributed to the Oil Price plunge. But didn’t we already know the Oil Slump last year and already prepare for the imminent slide in pricing of Keppel Corp.

Why Now the Hoo Haa… Strange? Market, Stocks, Human Beings….Haiz….

Enough of Oil Price and Financial Analysis…What is Business All About?

Many bloggers have discussed about Keppel Corp lately after the price slide. Refer to links as follows. B from 3F here; Frugal Daddy here; CW8888 here. I will not want to repeat another round of fundamental analysis but focus on the O&M business.

I think what we read so far are all about Oil Price and Financial Figures. i.e. Top-Down and Fundamental Analysis respectively.

To give you further insight into the company, I think it pays to also understand the BUSINESS MODEL of Kep Corp.

Business is related to: Clients, Competitors, Track Records, Vision into the Future, Leaders, Management, Technical Niche, Supply Chain, Systems, People, Business Diversifications, Business Model etc.


The O&M Business

Keppel Corporation is an Industrial Conglomerates with businesses in Offshore & Marine (O&M), Property, Infrastructure, and Investment. In 2014, O&M accounts for 55% of total net profit, followed by Property 26%, Infrastructure 17% and then Investment 2%.  Order Backlog as of 1H15 for O&M is S$11b. YTD order intake is S$1.5b. It tumbles from S$10b, 7b, 5.5b in 2012, 2013 & 2014 respectively.

Since I am more an “Oily Man” and the share price decline is primarily attributed to the Oil Crisis, I will only focus on the Offshore & Marine Business as follows.

Keppel O&M is mainly divided into 4 key businesses:

  • Offshore - Keppel Fels: Mainly related to Rigs and Drillships business. Design, build, refurbished.    
  • Marine - Keppel Shipyard: Mainly related to FPSO, FSO, FLNG, FSRU conversion, general ship repairs etc.
  • Specialised Shipbuilding - Keppel Singmarine: Mainly related to building of Customise vessels.
  • Technology – Basically supporting the design, R&D for all the aforementioned segments and third party clients.

Drilling Vessels Badly Hit
Rigs and drillship businesses are without doubt badly hit. When Shell, Exxon, BP are cutting CAPEX, more Rigs/drilling vessels will be idling. Demand and Supply, simple as that. Hence KepFels has no rig orders as yet this year. Suspect things will not be any better if oil price stay the same.

While there are so many news about the workforce cutting, bear in mind, that sometimes the oil companies are also taking the opportunity to “Trim Unnecessary Fats!”

Production and Specialized Vessels

Refer to my earlier post O&M Companies – If No Rig or OSV Orders, Then What? Specialized Vessels?


Oil price decline, CAPEX cut is for sure. While no new developments, instead oil companies need to drill more and produce more to increase the supply.

Therefore production and maintenance activities will continue. FLNG FPSO, FSO, Specialised vessels (liftboats, Artic Vessels), Windfarm Vessels etc will still be sporadically needed. But margins will be squeezed. This is why, almost all of KepCorp new S$1.5b contracts this year were from Specialised vessels. This implies that Keppel Shipyard and Keppel Singmarine are still clinching orders.

Edge Over Competitors

Competitors of Kep O&M are mainly from China and Korea.

We heard about the Chinese yards in oversupply numbers and shambles. Shares of Cosco is diving like an “airplane with defunct engines” with its share price half compared to a year ago, after announcing loss lately. Once largest private shipyard in China, RongSheng is also facing solvency. 3 powerhouse shipyards of Daewoo, Samsung and Hyundai are all seeing red and doing badly.

So for Singapore O&M companies of Kep O&M and Sembcorp Marine, they are indeed doing very really well comparatively.

In general, Keppel has an edge over its competitors. It has its own PROPIETARY in-house design. Most Chinese and Korean yards depend on 3rd party Designers from Europe and USA. Cost is higher, and integration will be more complicated. Moreover Keppel designs are PROVEN and STANDARDISED that gives a higher margins out of similar contracts when compared to competitors. For Rigs, Keppel also has their own jacking systems, which is a major part/cost of the jack up rig.


Most important of all is Kep O&M track records of vessels/Rigs built has been superb in terms of quality and timeliness, known market wide.


Reliable Supply Chain

Due to Singapore as the O&M hub, the supply chain of O&M companies in Singapore is one of the most complete, efficient, and very competitive for its value provided.

Keppel O&M had over the years built up a strong and reliable support from their suppliers. I am sure during this downturn, they will be also well-supported by their suppliers to share some of the burden due to the order intake decline.

Vision - LNG Shaping The Future

It is without doubt that Keppel is seeing competition from low cost China yards in recent years, and they had indeed planned the need to move up the value chain several years ago.

This is why you see her still clinching the Golar FLNG order last year and this year. They are also building Artic vessels which are traditionally the market of the Norwegian shipyards. E.g.  Vard.

Singapore is investing in LNG future. Last year the first LNG receiving terminal was opened. There is also a second terminal in long-term planning, estimated to be operational only from 2025 to 2030.

With this vision into the future, company like Keppel will continue to evolve over time. Hence sometimes our focus on the current Oil Crisis and Order Intake can be unfounded and not wholly justifiable over the longer term of 5-10 or even 20 years investment horizon.


Strong Shareholders, Leadership, People & Diversification


Strong Shareholder
KepCorp has the strong backing of Temasek holdings as the largest shareholder. This provides some comfort to investors.

Competent People
Market-wide known, Keppel O&M has very low employee turnover rate, unlike other shipbuilding competitors in the sector. Most of Kep O&M management team have been in the company or industry for many years now. Being the largest rig builders in the world, the current leaders have gained an extensive experiences and expertise as they grew within the company for many years. 

Keppel O&M has excellent departments/divisions rotational schemes for its employees to grow their skills not just within their initial core competency. For e.g. you can be rotated from engineering or production, to project then to commercial.  Job satisfaction is promoted this way and possibly a reason contributing to the high employee retention rate.

Low employees’ turnover in a very specialized and technical environment is of utmost importance. This explains the quality and service provided to clients who return after a project.

Diversification Into The Future
For years, Keppel has transformed from a small shipyard to shipyards worldwide. This is called regional diversification.

It has also grown its Property, Infrastructure and Investment businesses aside from O&M. This is called business diversification.

The appointment of Loh Chin Hua as CEO in 2014 with financial background rather than with Engineering or O&M background which is normally the prerequisite of KepCorp CEO, also further echo the company gearing into FURTHER DIVERSIFICATION away from the capex heavy O&M segment. Not long after, comes the complete takeover of KepLand.

Rolf’s Conclusion

So now comes the questions from the readers that are most challenging for me?

Should I buy Keppel Corp now? 

Rolf’s Reply:

“ Er……When do you intend to sell if you buy now? After you buy now, if price drop, will you buy more? If price rise, do you have a benchmark price of selling?" 

With the above, I do think that Keppel is a good company stemming from what I know and the past track records. However that explains nothing over the unknown future. Not to mention the cyclic industry and irrational stock market. 

Now you know why my blog is not as Popular!

Haha LOL.




14 comments:

  1. Keppel Corp may transform to become Merlion with "Wings" or "Legs"?

    Great company will have to transform itself or become extinct.

    ReplyDelete
    Replies
    1. Hi CW,

      I think LNG may bring them to the next level. Some kind of JV with Pavillion or other company, while the continue to build property, infrastructure, and investments.

      I still think oil will come back. The drop is too drastic and fast and seems like some conspiracy theory.

      Alternative energy takes time. Oil industry is energy so closely related with alternative. With current world turmoil, I know lots of wind farm company is suffering or even bankrupt. It is just too expensive for next 10 yrs for alternative energy. Even if it succeeds, maybe Kep or sembcorp will already go into it as well. Hope they have the vision and do Singapore proud.

      Does not matter if I got own their shares or not,

      Delete
  2. How a company can survive through many months (or years) of uncertainty is important.

    ReplyDelete
    Replies
    1. Hi Money Honey,

      Just have to look at track records. It's all about survival of the fittest and I think Kep and Semb Corp belongs to the category that can weather the storm.

      But most people only want to know at what price and when to buy, not if they will survive.

      Delete
  3. Great information. Do you think Keppel's competency in o&m can be leveraged at other industry? Because oil price may stay low for years or for ever, do they have other battle field to turn around?

    ReplyDelete
    Replies
    1. Hi AhJohn,

      Thanks. For short term, I do not think so. But what I am saying is the company may evolve over long term.

      By the way, I do not think anybody can predict oil price in the last 50 years.

      Oil price is $20 in 1973 then shot up to >100 in 1979. Then plunge <30 in Mid 80s. End 90s slide to a low of <20. Then after 2000 it was up all the way until Jun 2008 to >140, then plunge during GFC and rebound quickly and now down again….

      So you can hear all sorts of stories of predictions of oil price. Or… I think this, I think that….Frankly all are just speculative, and pretty much irrelevant.

      Delete
  4. Hi Rolf

    As usual, another great view from someone "drinking oil" every day. Haha.

    Action speaks louder than words. Tell us what price you are aiming and I will consider to follow suit. I know you will say to ask me to do my own research. Come on :)

    ReplyDelete
    Replies
    1. Hi FD,

      I am not vested now, but I think it is not only which price to buy that matters, we need to guest the cycles of the oil, which is so difficult. You need to buy just before the Oil cycle trend up or just after.

      As what I explained to AhJohn above, nobody can predict the Oil Price.

      For something I am unsure, the advice is better not touch for now or SLOWLY AVERAGE DOWN little by little throughout a long period. For those I already owned, I continue hold.

      For Price possibility of me slowing averaging down KepCorp (I never say confirm), with 1H2015 earnings unchanged, it will be at least another 10% down from now. Maybe can use it for trading, then it is a diff story.

      So many people are predicting Oil industry will stabilised in 2017….. and so it means maybe earlier orders will start trickling in late 2016. We shall see.. this is what the market people all say.

      Delete
  5. Hi Rolf

    Great take there on the O&M segment and the industry as a whole.

    I like how you see Keppel as evolving more into the future LNG vision which will bring about more growth than the typical rig upstream maintenance and drilling, which has been their core all these while.

    I'd also agree that over the years, they've come up stronger by investing and divesting first their banks arm and then now their properties arm, so it is unfair to give them the death sentence just by relating them to oil prices correlation.

    ReplyDelete
    Replies
    1. Hi B,

      I only says Kep and Sembcorp are good companies. But I never say their share price will not continue to slide.

      But what I am sure is, they are consistently going through change to grow. Many companies do not do that, trust me!

      Delete
  6. Hi Rolf,

    Thank for the great insight into Keppel O&M current business climate. I presume SCI / SMM is experiencing the same as Keppel O&M? Thanks!

    ReplyDelete
    Replies
    1. Hi Boonchin,

      Thanks. Unfortunately, I do own SCI and I think I did not make the wise choice at time of buying. Haha.....you know too many top bloggers say BUY.....got distracted....Nah...Blamed it on myself! Anyway I learnt!

      Truthfully, both are good companies, but I think KepCorp is a much better company than SCI or SMM.

      KC is more diversified, design more niche and better marketability, people in O&M more experienced across the board. SMM also has the new upcoming megayard to content with, which requires new adaptability, funds affecting balance sheet. SMM is also weaker in specialised ships division compare to Keppel. Etc etc

      Delete
  7. hi Rolf, thanks for the write up based on your experience. i would like to get your perspective on the supply of rigs. it would seem that the recent production of rigs will replace all the greater than 30 year old rigs. in this case, the number of rig demand in the future will be much scale down right.

    in the past 80s and 90s, there was a time when there was very very little rigs built, and 90s was a time when keppel fels practically have no businesses in rigs. do you have some views on this?

    ReplyDelete
    Replies
    1. Hi Kyith,

      You are right. The rigs of today are aging!

      According to a presentation by Transocean (one of world's largest rig owners) last year July, it states that at present, 160 Floaters and 216 (half of total) Jackups are 30+ yrs old. By stats!

      Esp after the BP incidents, there are lots of new regulations imposed in recent yrs. Lots of the aging fleet cannot meet the regulation requirements. Hence need to be scrap!

      Hence rig owners need to actively replacing lower-spec rigs for fleet renewal. It is an active process which by right, they need to invest each year.

      Eg before oil crisis last year, Transocean says they will invest us$1.5-2b a yr.

      In presentation in May, capex is reduced to us$700-1.6b per year up from 2015-2018.

      Base on Transocean stats, I seriously think that the current order backlog in construction not sufficient to replace the aging fleet.

      But the problem now is the depressed oil price causing the temporary over-supply of rigs. Hence all owners are postponing their capex!

      Oil price has stay almost averagely below 50 for 20 yrs bet 1985-2005. So naturally, there are so few rigs!

      Base on above analysis, the price of oil is clearly still the driver of rig demand.

      Hope my humble opinion helps a little.

      Delete