A Deeper Look at Keppel Corporation Limited’s Financial Performance In The First Half of 2018
An important key to investing is to understand and critically evaluate the business behind every stock. Understanding and interpreting financial statements, especially those from diverse conglomerates such as Keppel Corporation Limited (SGX: BN4), can go a long way in honing our research skills and insight.
In July, Keppel Corp announced that its net profit for the first six months of 2018 rose 38% year-on-year to S$583 million. Keppel Corp’s business comprises four divisions: Property; Offshore and Marine; Infrastructure; and Investments.
When we take a more in-depth look at the performance of each division, we see that the Property division contributed to the bulk of Keppel Corp’s net profit; the division’s bottom line for the first half of 2018 came in at S$603 million (up 214% year-on-year). Two divisions – Offshore & Marine and Investments – suffered losses of S$40 million and S$46 million, respectively. The losses were partially offset by profit of S$66 million from the Infrastructure division. So, two out of four divisions did not turn a profit for Keppel Corp in the first half of 2018, and it is clear that the Property division is currently the most important profit generator for the conglomerate.
Interestingly, if we look at the revenue contributions by division, Infrastructure’s contribution to Keppel Corp was 40%, or S$1.2 billion. Offshore & Marine contributed S$939 million or 31%. Property only had a 26% contribution at S$787 million.
When we consolidate our analysis, we see that 70% of Keppel Corp’s revenue was derived from its Offshore and Infrastructure divisions, but their contribution to the conglomerate’s overall net profit was just S$26 million, or 4% of the total. It is also clear that the near-term outlook is challenging for the two divisions that contribute over two-thirds of Keppel Corp’s revenue stream.
Since the Property division is Keppel Corp’s most important profit generator, it is worth taking a deeper look at that business to have a better idea of the conglomerate’s financial performance in the future. In the first half of 2018, one of the big contributors to Keppel Corp’s 38% profit growth was a significant increase in other operating income from S$23 million a year ago to S$420 million. Now, the major components of Keppel Corp’s other operating income in the first half of 2018 were gains from the sale of two China subsidiaries from the Property division.
In summary, an important contributor to Keppel Corp’s bottom line in the first half of 2018 remains its Property division, of which one-time divestments of Chinese subsidiaries helped boost growth. As we look ahead to 2019 and beyond, for Keppel Corp to sustain or improve its net profit, a stronger performance from its Offshore & Marine and Infrastructure divisions would play a significant role, especially since the current property outlook in Singapore and rising interest rates are not favourable to the Property division.