Keppel's restructuring bearing
fruits
24 April 2002
On 18 April, Singapore's government-linked conglomerate Keppel Corporation announced a set of strong results for the first quarter of 2002. Although revenue declined by 24 percent -- largely due to the sale of Keppel Capital -- net profit rose by 47 percent, helped by an almost six-fold rise in profit after tax and minority interest from the offshore and marine division.
Prospects for the group are good. It has an order book of $3.5 billion, of which $2.2 billion is from the offshore and marine division. Consensus earnings per share are at 38.5 cents and 46.5 cents for 2002 and 2003 respectively. At $4.06, the stock is trading at a prospective P/E ratio of 10.5 for 2002 and 8.7 for 2003, which are about half the corresponding figures of 21 and 17 for the Straits Times Index.
So while the stock price for Keppel has risen by 43 percent since the beginning of the year -- on top of a 50 cents a share capital distribution paid in December last year -- there is potential for further gains. Brokerage firm UOB Kay Hian, for example, pegs the stock at a fair value of $5.25.
Keppel is a good example of what can happen when management sets its mind on enhancing shareholder value. In Keppel's annual report for 2001, chairman Lim Chee Onn reiterated the need to improve the group's return on equity and exercise capital discipline in growing its businesses. Over the past year, Lim has sold Keppel Capital, privatised Keppel FELS Energy and Infrastructure and Keppel Hitachi Zosen, and identified three core businesses -- offshore and marine, infrastructure and property development -- for the group to focus on. These actions have convinced analysts and investors that the group is moving in the right direction, and the improved sentiment is being reflected in the stock's performance.
Of course, Keppel's stock performance was helped by the fact that the stock price started the year at an 18 percent discount to its 2001 net tangible asset per share. Other government-linked companies may not get the same kick from their restructuring efforts. SembCorp Industries, for example, whose own shipyard operation was, at one time, considering a merger with Keppel's, is currently trading at 2.8 times net tangible asset per share. While this reflects SembCorp's higher efficiencies, the corollary is that there is less scope to improve its operations from the restructuring exercise.
Nevertheless, a management team's emphasis on enhancing shareholder value tends to help the company's financial performance as well as the stock's price. As it is, SembCorp has already moved away from the direction that it had taken under the previous leadership of Philip Yeo, when it was buying up companies in unrelated businesses like Delifrance. Yeo's get-it-done-at-all-cost style tends to result in inefficient utilisation of capital and reduces shareholder value, although it apparently served him well in the civil service where he came from, where financial performance is less transparent, at least to the ultimate shareholders, the taxpayers.
Hopefully, the rationalisation process being undertaken by corporate Singapore improves efficiencies, raises rates of return on equity, increases market valuations and, ultimately, enhances returns to investors.
Disclaimer: The commentaries posted here represent the opinions of the author at the time of posting and should not be taken as investment advice. Readers who wish to take any investment action based on information obtained from this site should seek appropriate advice from a qualified financial adviser.