Keppel Corporation Limited

Chan Hon Chew - Chief Financial Officer Loh Chin Hua - Chief Executive Officer; Executive Chairman, Keppel Land

Cheryl Lee - UBS Joshua Lee - Deutsche Bank Gerald Wong - Credit Suisse Siew Khee - CIMB

Good evening. Welcome to the conference and webcast on Keppel Corporation’s results and performance in the first quarter of 2018.

Markets have been roiled in recent weeks by concerns over rising trade tensions between the U.S. and China as well as the situation in the Middle East.

However, the global economy continues to enjoy broad based growth with improved business sentiments in both advance economies and emerging markets. Strong urbanization trends continue to present many opportunities for the Keppel group across our businesses.

At the same time, we are also witnessing rapid change in the operating environment with disruptive new technologies and business models, digitization, AI and robotics, changing how business is conducted. Against this shifting backdrop, the Keppel Group remains resilient, underpinned by our multi business strategy and continues to pursue opportunities as a provider of solutions for sustainable urbanization.

For the first quarter of 2018, the group achieved a net profit of $337 million, 34% higher than in the same period of the previous year. Economic value added for the period was $186 million, while our return on equity was 11.4% on an annualized basis.

Free cash flow for the first quarter 2018 was $261 million a marked improvement compared to the free cash outflow of $62 million for the first quarter 2017. Our net gearing was 0.42 as at end March 2018, lower than the 0.46 as at end December 2017.

I will now take you through the key developments in our business divisions. We are seeing increasing confidence in the off-shore and marine business underpinned by rising oil prices.

While there are pockets of opportunities in niche markets, it may take some time before we can see sustained recovery across the board. The jackup market continues to be plagued by a supply overhang with both utilization and day rates remaining soft.

Due to the reduced volume of work and our share of associate companies losses Keppel O&M made a loss of $23 million for first quarter 2018. Operating profit for the business for the division was $8 million in this quarter, slightly higher than the $4 million in first quarter 2017.

Despite the challenging environment, Keppel O&M secured new contracts worth about $580 million year-to-date. This includes a contract to build a mid-water, harsh-environment, semi-submersible worth about US 425 million for Awilco Drilling with options to build three similar units to be exercised progressively over 36 months.

Securing the order from Awilco is a significant milestone as it is our first new build drilling rig order since the start of the downturn in 2014. It also demonstrates that despite the downturn, the industry continues to have a preference for high specification rigs to be built by a reliable partner.

Earlier this month, we also announced a new order for a dual fuel tanker. This is a seven dual fuel LNG powered vessel to be built by Keppel O&M which is testament to our ability to provide compelling solutions across the gas value chain.

In January, Keppel O&M delivered the first of its five jackup rigs novated to Borr Drilling last year. The first rig, SAGA built to our proprietary KFELS Super B Class design was delivered safely on time, and on budget.

We are on track to deliver the second rig to Borr Drilling later this year. Keppel O&M’s net order book as at end March 2018 stood at $4.3 billion compared to $3.9 billion at the end of 2017.

Earlier this month, we announced a corporation agreement among Keppel FELS, Keppel Shipyard and KrisEnergy where Keppel as a preferred contractor will offer KrisEnergy a comprehensive suite of off-shore Oil & Gas solutions. This is subject to the agreement of KrisEnergy’s shareholders at an EGM later this month.

In March, Hilli Episeyo, the world’s first converted floating liquefaction vessel which Keppel built in partnership with Golar achieved first gas in offshore Cameroon. With the successful first production, the market is gaining increasing confidence in converted FLNG solutions.

Golar has reported that the proof-of-concept in Hilli Episeyo is expected to speed up and open a wider variety of financing alternatives for the Fortuna project where the second converted FLNG vessel, Gandria will be deployed. The vessel has since moved from layup and is currently in Keppel Shipyard for early works.

As we had announced previously, Keppel O&M is taking advantage of the downturn to streamline operations, build new capabilities and capture new markets. To help our customers improve operational efficiency and lower costs across the project lifecycle, Keppel O&M is developing rigs of the future through increasing digitalization, utilizing smart sensors, capturing and analyzing data, and offering enhanced solutions.

With these rigs, we aim to transform the current operating environment to become more efficient and versatile without compromising on safety. To push out these innovations, Keppel O&M is also developing yachts of the future by incorporating robotics and AI into our manufacturing process.

We’re also collaborating with equipment providers to see how we can improve the operations of rigs that we built, by extracting and leveraging timely and insightful data. Our end-to-end gas strategy will also unveil new opportunities for the group, taking us beyond the shipyards regular turnkey business model to become a developer, owner and operator of floating energy infrastructure.

With proven cryogenic expertise and the ability to stitch up the entire guest value chain we are well placed to address this growing market segment. Keppel O&M also seeks to play a part in the electrification of archipelagic states using our proprietary floating LNG solutions.

As Oil & Gas majors are gradually shifting their business focus to renewable, we are also actively considering expansion into the space. Our property division made a net profit of $378 million in 1Q, 2018 compared to $95 million in the same period last year.

This was largely due to the divestment of Keppel Land China’s stake in Keppel China Marina Holdings yielding a gain of $289 million. The development and divestment of Keppel Cove in Zhongshan reflects Keppel’s ability to develop premium properties and recycle assets for higher returns.

We’ll continue to focus on our five key cities of Shanghai, Beijing, Tianjin, Chengdu, and Wuxi, where we have established strong track records and local teams. Keppel Land continues to deepen its presence in its growth market, Vietnam.

During the quarter, Keppel Land announced the acquisition of the remaining 10% stake in Saigon Sports City in Ho Chi Minh City. This would put Keppel Land in an even better position to transform the township into an efficient and vibrant smart integrated development.

Separately, it has obtained full ownership of Keppel Land retail management, which provides a full range of professional, real estate services in Asia. Keppel Land sold about 300 homes this quarter, compared to 980 homes in first quarter 2017, comprising 190 homes in China, 15 Vietnam, and 60 in Singapore.

The total sales value year-to-date is about $290 million. This does not include the divestment of the Zhongshan project which is equivalent to 1,647 homes sold on block.

The Chinese government continues to impose cooling measures to dampen speculation and curb increasing home prices. Transaction volumes in China have fallen and are expected to remain subdued in the year, even though demand remains strong, especially in first and second tier cities where inventories are low.

We have to 2400 launch 3-D units in China in 2018 and are well-positioned to seize opportunities when the market picks up. In Vietnam and India, we have received strong expression of interest for new launches coming up and we expect to see a pickup in sales later this year.

In Jakarta, Phase 2 of the Riviera at Puri has also been well received with more than 60% of the 141 units launch sold within days of their launch earlier this month. In Singapore, positive market sentiments have been strengthening on the back of an improved economic outlook, the search in collective sales and successful property launches.

We are pleased to update the Highline residences comprising of 500 homes have been completely sold out, ahead of the ABSD deadline this month. To capitalize on the improving market conditions, we plan to activate some of our Singapore Landbank including launching homes in our Serangoon site later this year.

We have a Landbank of about 1700 units in Singapore including around 500 units from the redevelopment of Keppel Towers and Nassim Woods. We are not in a hurry to acquire land.

We will continue to lookout for potential deals and acquisitions but will remain disciplined in bidding for sites. Keppel Land currently has a larger landbank comprising about 61,000 homes across key cities in Asia, of which over 16,000 are, launch ready from now till 2020.

In our commercial portfolio, we have over 1.5 million square meters of gross floor area which will provide us with a steady stream of recovery income as our SS are completed and stabilized. Our infrastructure division continues to perform well, achieving a net profit of $26 million for first quarter 2018.

Excluding the gain from the divestment of GE Keppel Energy Services in 1Q, 2017 earnings have risen by 30% underpinned by higher contributions from environmental infrastructure and infrastructure services. This month, the energy market authority commenced the soft launch of its open electricity market in Jurong.

So far, the response to Keppel Electric’s retail offerings for households has been encouraging. With the experience gained during the pilot program in Jurong, Keppel Electric will be well-positioned to offer competitive packages to consumers following the full liberalization of the retail electricity market later this year.

Environmental infrastructure steered by Keppel Seghers continues to build on its track record as a leading provider of comprehensive environmental solutions. During the quarter, Keppel Seghers received performance bonuses and signed a five-year technical support agreement for the Runcorn Energy-from-Waste facility, in the U.K.

reflecting its strength in environmental technology and services. Keppler infrastructure services contributed commendably and will continue to deliver high quality and value added operations and maintenance services.

In our data center business, Keppel data center has partnered with DE-CIX, the German commercial Internet exchange to enhance network connectivity. The partnership will see Keppel DC Frankfurt 1, a high-availability carrier-neutral data centre managed by Keppel Data Centres and located in Frankfurt am Main, offer interconnectivity services as a DE-CIX Enabled Site.

The investment division recorded a net loss of $44 million in the first quarter 2018 compared to a profit of $125 million in the same quarter last year, due mainly to the fair value loss on the KrisEnergy warrants and absence of profit from land sales in the Sino Singapore Tianjin eco city. Our asset management business generated a net profit of $9 million for the quarter, slightly lower than in first Q, 2017 due to fair value loss on investments.

Keppel DC REIT completed the acquisition of maincubes Data Centre in Offenbach am Main, a key data centre hub located near Frankfurt, Germany which will contribute to positive total unit holder returns and enhance recurring income streams. In the private equity space, the Alpha Asia Macro Trends Fund II divested two assess in China and Korea, achieving overall IRR above the mid-teens.

This is a further reflection of how Keppel has been able to add value to properties that we acquire. The newly established Keppel Urban Solutions also make headway in its strategy to be an end-to-end master developer of urban developments.

Following the MOU signed with Envision earlier this year, Keppel Urban Solutions is working on leveraging and visions Energy IOT platform to develop solutions for smart energy management. Keppel Urban Solutions is also making steady progress in building up an ecosystem of like-minded partnerships for Saigon Sports City to deliver differentiated digital services and to improve livability as well as enhance user experiences.

Prior to 2016, our investment division had consisted mainly of the groups holdings in key associates, such as M1, KrisEnergy and SS tag [ph]. In the past two years, we’ve added to it new operating subsidiaries, Keppel Capital and Keppel Urban Solutions.

Today, the investment divisions also serves as an incubator of future growth engines for the group, which would drive and harness synergies across our key business verticals and also contribute to growing stable recurring income. As we write the next chapter of Keppel’s growth story, we will work closely together as one Keppel with a common purpose to provide compelling solutions for sustainable urbanization and create value for all our stakeholders.

Let me now invite our CFO, Hon Chew to take you through the group’s financials. Thank you.

Thank you, Chin Hua. And a very good evening to all.

I shall now take you through the group’s financial performance for the first quarter of 2018. In this quarter, the group recorded a net profit of $337 million which was 34% higher than the same quarter last year.

Correspondingly, earnings per share increased by the same extent to $18.6. This translates to a higher annualized ROAE of 11.4% and EVA was also higher at $186 million.

Free cash flow was $261 million as compared to an outflow of $62 million in the first quarter, due mainly to proceeds from the divestment of Keppel China Marina Holdings Private Limited which holds an interest in a residential cum marina development in Zhongshan. Consequently, net gearing improved from 46% as at last year-end to 42% as at this quarter end.

Next, the summary group financial losses profit and loss statement; the group’s revenue for the first quarter was 18% or $222 million higher than the same quarter last year. Higher revenues from property and infrastructure divisions were partially offset by lower revenues from Offshore and Marine division.

Operating profit for the quarter increased by 154% or $284 million to $468 million, boosted by the gain on divestment of Keppel China Marina holdings, profit before tax at $430 million, however increased by lower margin of 49% due mainly to share of losses from associates compared against the share of profits last year. In Q1 last year, the Group benefited from the Sino-Singapore Tianjin Eco-City sale of three land parcels at record prices, as well as the share of associates gains from the divestment of Central Park City in Wuxi and Botanica in Chengdu.

After tax and non-controlling interest, net profit was 34% higher at $337 million translating to an earnings per share of $18.6. In the next slide, we’ll take the closer look at the Group’s revenues by division.

The Group’s revenue at $1.5 billion was 18% higher than the same quarter last year. This was despite the 31% decline in Offshore and Marine Division resulting from lower volume of work and deferment of some projects.

On the other hand, the property divisions revenues double from last year mainly due to higher revenue from Singapore projects as a higher number of units were sold from Highline Residences and Reflections at Keppel Bay. As such, China projects from the handover of completed units at Waterfront Residences in Tianjin, Park Avenue Heights in Chengdu and Park Avenue Heights in Wuxi.

Infrastructure division too saw a 21% growth in revenue, as a result of increased sales in the power and gas business and recognition of progressive revenue from the Keppel Marina East Desalination Plant project. Moving on to the Group's pretax profit.

The Group recorded $430 million of pretax profit for the first quarter of 2018, 49% higher than last year. The Offshore and Marine division recorded pretax -- higher pretax losses despite having a high operating profit many due to share of losses from associate companies compared to a share of profits in the same period last year.

The division's operating margin was 2.4% as compared to 0.8% in the first quarter last year. The property division registered a $342 million increase in pretax profit due to the gain on divestment of Keppel China Marina Holdings and higher net contribution from property trading, partly offset by lower contribution from associated companies in the absence of gain on divestment of trading projects in China and Indonesia compared to last year.

The infrastructure division’s pretax profit was 19% lower than last year as the $12 million profiting gain from divestment of GE Keppel Energy Services boosted the profits in the first quarter of 2017. Excluding the divestment gain infrastructure division’s pretax profit would have increased by $5 million or 20% due mainly to progressive recognition of profit from Marina East Desalination Plant project and higher contributions from infrastructure services.

Investments division recorded a pretax loss of $40 million as compared to a pretax profit of $141 million in the same quarter last year. This was mainly due to the absence of sale of three land parcels at the Sino-Singapore Tianjin Eco-City compared to last year and fair value loss on KrisEnergy warrants.

After tax and non-controlling interest, the Group net profit increased by 34% or $85 million, with Property division being the top contributor to the Group's earnings followed by infrastructure. The Group’s net profit of $337 million for the first quarter translated to earnings per share of $18.6.

Cash flow for the Group's operations was $162 million in this quarter, up from $95 million in the same quarter of last year. After accounting for working capital changes, interest and tax net cash outflow from operating activities was $10 million as compared to $45 million in the first quarter of 2017 due mainly to increasing working capital requirements in Offshore, Marine and Property divisions.

Net cash generated from investing activities was $271 million comprising divestment proceeds and dividend income from associated companies totaling $516 million, but the offset by net repayment of advances from associated companies of 211 million. As a result there was an overall free cash inflow of $261 million during the quarter, as compared to an outflow of $62 million in the same period last year.

With that, we have come to the end of the slides for the results presentation. And I shall hand the time back to our CEO, Chin Hua for the Q&A section.

Thank you.

Thank you, Hon Chew. Okay.

Q&A, I see a couple of questions already coming in. First question is from Cheryl Lee of UBS Singapore.

Hi. Good evening.

On O&M why was the tax rate high this quarter? Could we also have an update on the CAN DO drillship status?

And have there been inquiries for this vessel? Could we also have an update on the Sete rigs and whether few of the units could be completed?

Okay. On question one, the answer is that, we had to take a provision for deferred taxes by KOM USA due to the change in the tax rates announced by the U.S.

President. On question two, can I get Chris to give an update?

Okay. On the query on CAN DO drillship, the status of the CAN DO drillship right now is under construction, final stages of testing.

It is scheduled to be ready for the market fourth quarter this year. And right now we are talking to a few of our customers on the potential purchase or other solutions to this CAN DO drillship.

Now on question three, for an update on Sete rigs and whether few of the units could be completed?

The present situation with Sete, they have preliminary agreement with Petrobras on resolution of some of their charter contract. But right now between us and Sete we still have a valid contract in place.

We have stopped work on all these six rigs pending on the resolution of the contract and we will update when there’s further news.

Thank you, Chris.

Second question is from Cindy Ngo of Philips Singapore.

My question is regarding Keppel Land’s development in Vietnam. I believe Keppel Land use to have investments in the north, two or three properties in Hanoi.

If you may please share with us Keppel Land’s plan for future investment in the north of Vietnam? Thank you.

Thanks, Cindy for the question. You are right Keppel Land used to have a couple of properties in the north.

They were divested in the recent years. This is part of our plan to focus our activity on the core city of Ho Chi Minh – the core market of Ho Chi Minh City.

Not to say that we will not develop properties in the north in the future, but I think the focus on Ho Chi Minh City has paid off handsomely. The team led by our President of Vietnam, Linson has been very successful in amalgamating quite a nice land bank in Ho Chi Minh City and together with a very strong local team as well we've been able to execute on some of these projects and established ourselves as one of the premier developers in the Ho Chi Minh City.

So no current plans to go, but of course that could be something we can review in the future. Okay.

Next question. This is question from Joshua Lee of Deutsche Bank, Singapore.

He has three questions.

First question, were there any one-off items which caused investments divisions EBIT loss. Second question is further restructuring required in the O&M division.

And third, what is Keppel Capital’s AUM currently and as our first quarter 2018?

Maybe I ask Hon Chew to answer the first question.

Thank you, Chin Hua. Actually, it’s not due to any one-off item.

In the first quarter this year the loss actually, mainly arises from the share of losses at KrisEnergy. As matter of fact last year it was also a share of loss, in fact a higher, but last year because we have the benefit of the gains from the land sales at the Tianjin Eco-City which has substantially offset those losses.

Thank you. The O&M division as I have said in the previous results briefing we have gone through a very lengthy rightsizing exercise starting in early 2015.

We believe that for KOM we are at a point where we are about right size. Right now, we think the key for us is to look for a new revenue growth, new orders and the contract with Awilco for the harsh environment mid-water semi is a very important win for us.

We will continue to hunt for new projects, but the restructuring is pretty much done, but we will still have to watch very carefully. I think one of the key parts that you might notice is that the Division’s quarterly revenue of this quarter is one of the lowest in number of years and despite that we still had a operating -- small operating profit.

The losses were as a result of some of our associates, as well as the tax provision that was taken in the U.S. Maybe I ask Christina to handle that question.

Hi. Joshua, on Keppel Capital’s AUM we are about 29 billion Sing dollar wise.

We just – actually do just annual tabulation of this number, so we don’t do the frequent quarterly updates on Keppel Capital’s AUM.

Thank you.

We have another follow-up question from Cheryl Lee, UBS, Singapore.

In the balance sheet there’s a new item called Contract Assets. Are these related to offshore and marine?

Yes. I’ll take this question.

Basically this arises from the adoption of a new accounting standard, SFRS 15 [ph] which is effective 1st January 2018. Basically it requires the reclassification of work in progress in excess of billings from stocks to contract asset separately on the balance sheet.

And this related not just KOM but include the Property division as well. And if you want more information you can refer the page 16 of the SGXNet announcement.

Thank you.

Okay. Next question we have three questions from AJ [ph] of JP Morgan Singapore.

First question, can management explain the difference between the 289 million gain on Keppel Cove mentioned in the PowerPoint versus 337 million gain mention in the financial accounts?

AJ, these are two different numbers, I mean 289 gain is on the divestment of Keppel Cove. The 337 million as a CFO explain is the Group’s quarterly results, I think, yes.

I think AJ, might…

Maybe he referring to the –

What mentioned in my address, pretax gain on the Keppel Cove is 337 million after tax it’s 289; coincidently it’s a same number.

So, I hope you got that AJ.

How much is loss on KrisEngery warrants?

I don’t think we’ll disclose it. We don’t disclose that.

What is the fair value gain of 12.7 million on inventory related – what does it relate to?

Hon Chew?

It’s actually write-back of provision on one of the Keppel Land’s projects in Singapore. It’s a write-back of provision.

Okay. Next question.

This next question is from Gerald Wong of Credit Suisse Singapore.

Gerald has two questions. First question, Sete Brazil could resume the construction of some drilling rigs following its settlement with Petrobras.

How quickly will you able to resume construction of the units upon notification by Sete Braxil? Chris?

I’ll take that question. While petrobras has approved the main terms for the possible agreement with Sete Brazil, the details of this agreement is still to be negotiated.

So, at this stage, we do not have answer on what is the agreement. And we will keep everybody posted if construction were to resume when agreement is there.

Thank you. Second question from Gerald is when do you expect to be able to launch Keppel Towers and Nassim Woods upon redevelopment?

For Nassim Woods, we could be quite fast. It could be even the second half towards the end of the year.

Keppel Towers more likely will be in early part of next year. But of course all depends on the market conditions.

We will take a decision later in the year. Okay.

Next question is from Conrad Werner of Macquarie, Singapore.

First question, what has caused its slowdown in SSTEC land sales? Is this also impacted by the cooling measures?

The answer is yes, it is impacted by the cooling measures.

Any more en-bloc sales in China we can expect for the balance of the year?

This is not something that we will provide a forecast on, but we will continuously review our portfolio. And in some cases if we get an interesting offer on kind of wholesale analysis, if it makes more sense for us to sell en-bloc we will do so, but there is no forecast for that.

Next question. Okay.

Next question is from

Okay. Next question is from Siew Khee from CIMB.

She has four questions.

What projects in O&M would differ?

I don’t believe any would differ this quarter.

Second question, O&M associate loss, can you please elaborate on the reasons?

This will be part of the -- I suppose our associates are also operating under quite challenging conditions. So whilst oil prices have improved, it may take a while before we see a broad based recovery.

Third question, when will you start recognizing Awilco's project? Hon Chew, you want to answer.

That would likely to be the fourth quarter of the year.

Fourth question, should we expect a significant slowdown in Tianjin Eco-City this year? What’s your view on the ground?

Well, as I mentioned earlier, there is some impact from the cooling measures and we have also said in previous results briefing that Tianjin Eco-City will be strong provider, contributor to the Group over the medium to long-term. But quarter-on-quarter there could be -- the sales of land is quite lumpy.

So quarter-to-quarter the performance may vary. So I don’t think we should look at – look too much into the quarter’s results, but looking at the overall I think we still believe that Tianjin Eco-City will be a very strong contributor to the Group in the years ahead.

Okay.

Okay. If there are any further questions, please post it.

Well, thank you everyone for attending this conference. Thank you.