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.
Refer also to my earlier post: Keppel and Sembcorp Marine Hit by Slow Orders - Chinese Competition
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
KepCorp has the strong backing of Temasek holdings as the largest shareholder. This provides some comfort to investors.
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.
So now comes the questions from the readers that are most challenging for me?
Should I buy Keppel Corp now?
“ 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!