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Are Keppel Corp’s Dividends Sustainable?

Keppel Corp reported solid results for 2021, paying dividends of 33 cents per share Dividend yield rose close to 6%. Is this sustainable?

Let’s start off with some solid numbers:

  • Net profits grew S$1.02 billion, up from S$506 million losses from a year earlier
  • Its return on equity (ROE) rose to 9%
  • Leverage (debt) went down

This is Keppel Corp’s latest financial results for 2021. Not too bad, not too bad.

What’s more, Keppel Corp said they will reward shareholders with 33 cents per share dividends from last year’s great results. 

That puts Keppel Corp’s dividend yield close to 6%.

Keppel Corp (SGX: BN4) is one of the most powerful Singapore GLCs. 

At S$10 billion market cap, this is one of the world’s biggest oil-rig builders — selling jack-ups to oil majors including Chevron, Shell and ExxonMobil.

A jack-up rig is a massive sea barge with three long support legs that’s jacked down onto the seafloor. This supports the drill that’s used to uncover deep sea oil. 

It’s also commonly called deep-sea drilling.

Keppel Corp is a juggernaut in the oil & gas industry 

Last year, it secured S$3.5 billion of new orders, hitting about close to S$5 billion of order books. 

And Keppel Corp has already delivered 9 big projects.

Keppel Corp is relentless in reducing debt. In fact, its leverage fell to 0.68x, down from 0.9x from a year earlier.

At first glance, it’s easy to forecast a big tailwind for Keppel Corp. Strong numbers, oil prices hitting close to US$100/barrel, daily rates for jack-ups are projected to hit US$140,000/day.

Meanwhile, Keppel Corp is also merging its oil rig business with SembCorp Marine. This is going to give Keppel Corp a huge asset boost. It all seems like a big turnaround for this Singapore GLC.

But the story is not so simple.

I’ve watched how Keppel Corp struggled for years because of low oil prices. 

And I admit it’s not easy to analyze Keppel Corp — it has a vast number of different businesses.

Even though I was drawn to Keppel Corp’s compelling valuation, I find…

Keppel’s crisis isn’t over yet. Not by a long shot

You see, most of Keppel Corp’s profits aren’t coming from oil rig business.

Instead, Keppel Corp relies heavily on property development and its REIT business.

That’s a problem.

Even though Keppel Corp reported a solid result for 2021, it struggles to profit from its main business. In fact, Keppel Corp only made S$66 million from selling oil rigs.

The rest of its profits? Property-related businesses:

  • S$632 million paper gain
  • S$497 million sales of its properties and assets
  • S$292 million recurring income from management fees of its REITs

Source: Keppel Corp FY2021 Presentation Slide

In fact, only a third of its income produced cash flow for Keppel Corp.

True, Keppel Corp wants to create a more recurring income base, which is in line with the company’s Vision 2030.

Source: Keppel Corp FY2021 Presentation Slide

But believe it or not, oil prices still drive Keppel Corp shares.

Since the oil price crash of 2015, this major oil & gas producer shares have continued to slide year after year. Today, its shares are stuck in the bargain bin, trading 48% lower than it was compared to 2014. 

 

Source: ShareInvestor Webpro

The truth is, it’s going to take awhile before the big global oil majors start ordering jack-ups rigs again. 

And it’s even harder to believe Keppel Corp can fully transform into a recurring income type of business at this point.

The big reason? Keppel Corp continues to compete in one of the most competitive property development industry in the world: China. 

Even though Keppel Corp managed to hit strong sales in China, it still has to deal with China government property clampdown, on top of competing with other local developers. 

Lastly, Keppel Corp needs to find ways to expand its property portfolio. It’s not easy since Keppel Corp is also competing with other Singapore REITs for high quality assets.

Is Keppel’s dividends sustainable?

Keppel Corp paid a solid dividend last year. 

But over the last 10 years, Keppel Corp paid declining dividends year after year. Since 2012, dividends dropped from 73.6 cents per share to 10 cents per share in 2020, at the height of the COVID pandemic. 

Keppel Corp aims to pay up to 50% of its net profits as dividends. I don’t expect dividends to grow consistently in the future.

You see, the principle behind investing is simple: if you have to wait for a company to turn profits from losses, the stock will take a long time to bounce up. And you’ll be stuck in a terrible position. 

In other words, it’s not easy to predict turnarounds like Keppel Corp.

What’s more, Keppel Corp’s competitive advantage is its oil rig business. But that still remains fragile.

Sometimes investing can be simple.

Willie Keng, CFA

Founder, Dividend Titan

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