The Directors of Keppel Corporation Limited advise the following unaudited results of the Group for the Third Quarter and Nine Months ended 30 September 2016.

For more information, please contact:

Ivana Chua (Ms)
Assistant General Manager
Group Corporate Communications
Keppel Corporation Limited
DID: (65) 6413 6436
Email: ivana.chua@kepcorp.com

THIRD QUARTER & NINE MONTHS 2016 REPORT CARD

1. The Property Division was the largest contributor to Group net profit for 3Q & 9M 2016.

    i. 3Q 2016 Net Profit down 38% to S$225 million, compared to S$363 million for 3Q 2015.

   ii. 9M 2016 Net Profit down 43% to S$641 million, compared to S$1,120 million for 9M 2015.

   iii. RIDs contributed S$91 million or 14% of Net Profit for 9M 2016.

2. Earnings per Share was 35.3 cents, down 43% from 61.7 cents for 9M 2015.

3. Annualised Return on Equity was 7.6%.

4. 9M 2016 Economic Value Added decreased to S$39 million from S$456 million YoY.

5. Cash inflow of S$552 million, compared to cash outflow of S$784m a year ago.

6. Net gearing was 0.57x as at end-Sep, compared to 0.62x as at end-Jun.

 
SPEECH BY MR LOH CHIN HUA, CHIEF EXECUTIVE OFFICER
KEPPEL CORPORATION LIMITED

THIRD QUARTER AND NINE MONTHS ENDED 30 SEPTEMBER 2016

Welcome

1. 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.

Macro Environment

2. Global growth remains slow. Weak demand in the major 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 Q3, compared to the same quarter a year ago, which is the weakest rate of growth since the 2009 global financial crisis.

3. The landscape for Offshore & Marine (O&M) remains very challenging. The big news for the Oil & 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 US$50 per barrel. Despite the gradual recovery in oil price, demand in the 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 sheets, the oil majors are expected to continue to hold back on offshore exploration expenditure. On a more positive note, we see continuing interest in FPSO conversions and production solutions such as tension leg platforms and semi-submersible production units, as well as opportunities in the development of specialised vessels.

4. Also resilient amidst the global slowdown are strong urbanisation 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 urbanisation.

Building a Stronger Keppel

5. Keppel is responding with agility and resilience to the challenging environment, underpinned by our multi-business strategy.

6. Despite the strong headwinds affecting the O&M industry, Keppel O&M has remained profitable. 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 centre and asset management businesses serving as new areas of growth.

7. Rightsizing 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 re-purposing the technology that we have developed in the 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.

8. 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 OneKeppel, 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 directors' 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 rightsize our O&M Division and the sacrifices that our stakeholders have to make.

9. 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 centres, 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.

10. 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.

Financial Performance

11. In the first nine months of 2016, our business divisions achieved a net profit of S$641 million. This was down 43% year-on-year, mainly due to lower profit contributions from O&M Division.

12. EVA was S$39 million while our annualised ROE was 7.6%.

13. Cash from operating activities has reversed from an outflow of S$738 million in the first nine months of 2015 to an inflow of S$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 business.

14. Net gearing has reduced slightly from 0.62x as at end-June 2016 to 0.57x as at end-September 2016.

Offshore & Marine

15. Let me now take you through the businesses in our Group, starting with Offshore & Marine.

Building resilience & efficiency

16. In this quarter, Keppel O&M continued to rightsize, 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.

17. For the first nine months of the year, Keppel O&M has reduced its direct workforce by close to 8,000 or around 26%.

18. 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, especially those with strong engineering and project management expertise. Where possible, we will look to redeploy displaced talents to other business units within the Group.

19. Apart from reducing variable costs, 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 3Q 2016 and 12.5% for nine months of this year despite the lower top line. We are also reviewing our yard capacity in light of declining workload.

20. 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.

Brazil

21. We are monitoring the political developments and investigations in Brazil, which continue to widen in scope.

22. Earlier this month, we announced that following further internal investigations, Keppel recognised that certain transactions associated with the agent of some Keppel entities in Brazil may be suspicious. Keppel has since notified the authorities in the relevant jurisdictions of its intention to cooperate and work towards the resolution of the underlying issues arising from, or in connection with the transactions.

23. 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.

Key developments

24. The O&M Division has secured new contracts worth about S$500 million year-to-date.

25. Even as we work at optimising our operations and resources, we remain focused on the timely and effective execution of our order book. 20 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.

26. While we wait for more clarity on Sete's plans, we believe that the provision of S$230 million taken at the end of 2015 remains appropriate and adequate.

Growing LNG business

27. 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 specialised vessels, as well as non-oil and gas solutions.

28. 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 Organisation and the United Nations Climate Change Conference.

29. 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.

30. 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.

31. 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.

Providing Diverse Solutions

32. 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.

Property

33. Now to our Property Division.

Capital recycling for best risk-adjusted returns

34. Keppel Land has been actively implementing our strategy to recycle assets and focus on seeking higher returns. We have achieved divestment proceeds totalling about S$530 million year-to-date.

35. Amongst the divestments in this quarter is that of the 80% stake held by Keppel Land China and Alpha Investment Partners in Life Hub @ Jinqiao, a successful mixed-use development in Shanghai for US$517 million.

36. Significantly, our stake in Life Hub was divested based on the property's 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 enhancement 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 risks.

37. 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.

38. At the same time, we are seizing opportunities to redeploy our funds and have made investments of about S$430 million this year especially in our key markets in Vietnam and China, where we are strengthening our presence.

39. In Shanghai, Keppel Land China is acquiring a newly completed retail development in the upcoming Jiading District, for a total consideration of approximately S$102 million. Keppel Land Retail Management will be its manager and contribute to enhancing the value of the community mall.

40. The examples of the Life Hub and 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 Unboxed".

41. Strengthening our presence in Yangon, we are furthering our collaboration with Shwe Taung Group with a conditional joint venture agreement for a 40% stake in developing premium serviced 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 central business district.

42. 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.

Residential

43. 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 some S$1.6 billion.

44. Of these, 2,940 homes were 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.

45. 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. These new sales are not in our reported nine month numbers.

46. 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.

Commercial

47. We opened the much anticipated Saigon Centre retail mall on 1 August, with Takashimaya Department Store as its anchor tenant. Phase Two of Saigon Centre, which also includes 44,000 sm of premium Grade A office space as well as 195 luxury serviced apartments, is expected to be completed in end-2017.

Property Portfolio

48. In our residential portfolio, we have a 70,000-strong pipeline and over 16,000 launch-ready homes from now till end 2018. We aim to increase the inventory turn and launch more homes for sale, especially in those markets with favourable conditions. With a landbank 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 rightsize our property book and re-deploy the balance sheet space that is freed up for our other growth businesses. Our objective is not to create the largest landbank 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 ROEs in Asia.

49. On the commercial front, Keppel Land has over a million square metres of gross floor area under development. These projects will be progressively completed and will contribute to our recurring income and revaluation gains.

Infrastructure

50. I will now move on to our Infrastructure business.

Energy infrastructure & services

51. Keppel Seghers, a wholly-owned subsidiary of Keppel Infrastructure, has secured a contract from repeat customer Shenzhen Energy Environment Engineering Co to provide technology and services to the Bao'an waste-to-energy (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 imported WTE technology solutions providers in China.

52. We have also completed the handover, and commenced the operations and maintenance phase for the solids stream and sludge treatment facilities in the Doha North Sewage Treatment Works. 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.

Data Centres

53. The mega trends of data traffic, cloud computing and Big Data augur well for our data centre business. Demand for data centres remains strong in Europe and the Asia-Pacific. This is a business that we will continue to grow as Keppel Data Centres, a joint venture between Keppel T&T and Keppel Land, has firmly established itself as a trusted partner and operator of data centres 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 centres.

54. Earlier this week, we announced that Keppel Data Centres will unlock value with the divestment of 90% of Keppel DC Singapore 3 to Keppel DC REIT for over S$200 million. This allows Keppel Data Centres to recycle its capital and provides a valuable deal flow pipeline for unitholders of Keppel DC REIT.

Logistics

55. Keppel Logistics has just announced the acquisition of a stake in a Singapore-based e-commerce fulfilment company, Courex. This is in line with Keppel's plans to grow our Logistics Division by acquiring complementary capabilities to tap into fast-growing market sectors. Courex's cloud-based inventory management platform and crowdsourcing 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.

56. Meanwhile, our distribution centre in the Sino-Singapore Tianjin Eco City began operations in 3Q 2016, and will cater to the growing market in Northern China.

Investments

57. 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 Trust under Keppel Capital also form part of a critical ecosystem for capital recycling. It is a symbiotic relationship that we share with unitholders. As a strong and responsible sponsor, we have aligned our interests squarely with investors by co-investing significantly in the REITs and Trust 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.

58. Keppel Capital has recently received the approval from MAS to centralise 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 focused on investing successfully in real assets.

59. 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' interests at heart and making sure that any conflicts are properly managed will remain a key part of Keppel Capital's DNA and processes.

60. 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 alternative investments with steady, predictable cash flows.

61. We announced in the last quarter that Keppel Capital launched a new data centre fund and a property fund through Alpha Investment Partners with a combined target size of US$1.5 billion. I am 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 close to making its maiden acquisition. When fully invested, the two new private funds will add as much as US$3.5 billion to Keppel's total assets under management.

62. Our asset managers of the public-listed REITs and Trust have also made good progress. Keppel DC REIT's portfolio of quality data centres was expanded by new acquisitions in Italy and the UK in the past three months.

63. 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.

Fortifying Earnings Streams

64. Our strategic moves and rightsizing efforts ensure that the Group remains resilient and nimble in the face of harsh challenges.

65. We will continue to work our assets hard, and then recycle them at the right time, to earn the best risk-adjusted returns. Gains from revaluations, impairments and divestments contributed S$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.

66. For the first nine months of 2016, recurring income contributed S$237 million or 37% of the Group's total net profit. We are determined to improve the quality of our earnings by growing stable streams of recurring income for the long term.

Creating Synergies

67. By hunting as a pack and capitalising on synergies as OneKeppel, I am confident that we will perform better as a business, both in good times and when the going gets tougher.

68. 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 to power its 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.

69. The good returns from the divestment of our stake in Life Hub @ Jinqiao reflect the successful partnership between Keppel Land China and Alpha.

70. The Alpha Data Centre 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 winning propositions for customers and investors.

71. 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.

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

73. Thank you.

Attachments:

Download - KCL 3Q2016 Report Card
Download - KCL 3Q2016 Unaudited Financial Statements
Download - KCL 3Q2016 Results Slides