A

Keppel has gone through significant business transformation in the past five years. During this period, we rightsized and integrated Keppel Offshore & Marine’s (Keppel O&M) operating units, re‑positioning the Division amidst the offshore sector downturn. We evolved Keppel Land into a multi‑faceted property company focused on seeking higher returns. We also strengthened our data centres and logistics businesses, including establishing UrbanFox to extend our capabilities into the business-to-consumer (B2C) market. These are just some of the many strategic initiatives we have undertaken to stay relevant, unlock new opportunities and drive growth in a fast-changing landscape.

We have worked hard in the last few years to rally our different businesses around the common purpose of providing solutions for sustainable urbanisation, and encouraging them to hunt as a pack for opportunities. We have achieved significant traction on this front, with inter-company collaboration becoming an important part of our corporate culture and language.

Across the Group today, we not only share the same mission but also services for critical functions such as finance, IT and human resources. Supported by shared services, our operating units can focus on managing and growing their businesses, as well as harnessing the synergies of our multi-business group to offer compelling solutions and services to customers.

Keppel Telecommunications & Transportation (Keppel T&T) for instance, is working with Keppel O&M on a concept for floating data centre parks that utilise water for cooling, as well as exploring opportunities with Keppel Electric to offer bundled power solutions to our data centre customers in Singapore. We are seeing more of such examples come into play as our business verticals reach beyond their immediate playing fields for common opportunities as OneKeppel. In addition, business “horizontals” such as Keppel Capital provide funding platforms with co-investors, allowing us to seize growth opportunities across our chosen sectors, while generating recurring fee income for the Group.

As our growth story unfolds, our stakeholders and the market increasingly understand that Keppel is more than just an offshore and marine business, or property business, but an eco-system of companies, working together to provide solutions for sustainable urbanisation. With the privatisation of Keppel Land, the restructuring of our asset management businesses under Keppel Capital, and now the proposed scheme to privatise Keppel T&T, we are further simplifying our corporate structure. This gives us better control of the Group’s key business verticals, and the flexibility to allocate capital more efficiently towards investments with the best risk adjusted returns.

With a view to developing future growth engines, we are actively exploring and investing in new businesses such as senior living and renewable energy infrastructure. We are also expanding our presence in B2C businesses including electricity retail and urban logistics.

While some of the industries that we operate in are cyclical, sustainable urbanisation, and the solutions that we provide, will enjoy many decades of secular growth. As we grow our businesses, we aim to improve both the magnitude and quality of earnings. Our long-term goal is to have each key division contribute no more than 40% of the Group’s annual net profit, thus moderating our exposure to business-cycle risks.

The key pieces of our transformation have been put in place. We are now focused on executing and delivering on the growth initiatives, the results of which will come through in the next few years.

A

Keppel is a multi-business company. At various points in our history, we have expanded into and exited from different industries, taking into account the emerging trends and opportunities, to create value for our stakeholders. While we actively explore and invest in new businesses, we will stay disciplined, focusing on businesses that fall within our mission of providing solutions for sustainable urbanisation, and which harness the capabilities and synergies of the Keppel Group.

The consumer business is becoming more interesting with, among others, the advent of the sharing economy and the “uberisation” of assets, supported by a burgeoning middle class, who seek higher standards of living. We see attractive opportunities to cater to urban consumers at different life stages, as reflected in our efforts to enter the senior living and education real estate sectors.

Population ageing, especially in urban societies, will be one of the most significant social transformations of the twenty-first century, with wide-ranging implications on many sectors, including labour and financial markets, as well as the demand for goods and services. Our acquisition of a stake in a leading US senior living operator is a strategic move for Keppel to enter this new growth sector and also bring customised solutions to Singapore and other markets in Asia.

Renewable energy is not a new business for Keppel. We have been involved in renewables in different ways, including developing offshore wind turbine installation vessels, and designing and fabricating wind tower structures. As the world focuses increasingly on climate change and cleaner forms of energy, we see potential for Keppel to be more actively involved in renewable energy infrastructure.

A

The megatrend of urbanisation presents many exciting and interconnected opportunities. We are looking to capture growth from the digitalisation wave, studying how technology and connectivity can be more fully deployed in our solutions for sustainable urbanisation.

Artificial intelligence (AI), the Internet of Things (IoT) and 5G connectivity are driving a surge in data production, as well as powering new technologies from smart manufacturing to autonomous vehicles and intelligent retail. These developments will have an impact on the demand for data centres and network infrastructure, and at a more fundamental level, change the way people live, work, play and interact with their environments and one another.

Keppel Urban Solutions (KUS) seeks to harness the capabilities and track record of the Group to develop vibrant and digitally-connected smart cities, which tap sensing technology and IoT. Saigon Sports City in Ho Chi Minh City, Vietnam, which KUS is developing in collaboration with Keppel Land, and the proposed Smart IoT City at Taihu New City in Wuxi, China, are prime candidates for the test-bedding of some of the latest urban solutions, which KUS is partnering leading technology providers such as Envision, Microsoft and ST Engineering to deliver.

A

Our O&M Division performed commendably, reducing its net loss by almost half to $109 million from $207 million a year ago, if we exclude the one-off global resolution and related costs in 2017. Notably, the Division made a net profit of $6 million for FY 2018, before the $167 million provision for projects with Sete Brasil and other provisions and asset impairments of $44 million, partially offset by a write-back of provisions for claims.

Decisive rightsizing efforts over the past four years have helped to cut the Division’s overheads, and shape a leaner, fitter and more agile Keppel O&M that is more competitive and ready to seize opportunities, even against the backdrop of lower oil prices. Our efforts in positioning Keppel O&M to capture new opportunities in the gas, production and non drilling sectors have also paid off. In 2018, Keppel O&M secured $1.7 billion worth of new orders, up from $1.2 billion secured in 2017. Significantly, liquefied natural gas (LNG) and scrubber projects contributed over $600 million to new orders won in 2018.

Today, there are some early signs of improvement in the offshore rig sector, although we do not envisage a V-shaped recovery. More projects are being sanctioned at Brent oil prices of between US$55 and US$65 a barrel, the rig supply overhang is gradually reducing, and tendering activity is improving. In the production space, we see opportunities in Floating Production Storage and Offloading (FPSO) units, especially conversions, with several projects reaching their Final Investment Decisions (FID) in 2019 and 2020. The global demand for gas, led by Asia, continues to grow, with a few floating regasification projects expected to be sanctioned later this year. With reduced overheads, more of the revenues earned will flow down to our bottomline as we secure new orders.

Notwithstanding continuing challenges in the O&M sector, we remain cautiously optimistic about the business. Keppel O&M will aim to become profitable in 2019 by executing our projects well and growing the Division’s topline. As the market is very competitive, we will remain disciplined in bidding for new contracts, seeking only quality customers and projects with attractive risk-adjusted rewards.

A

Keppel Land’s established presence and sizeable landbank across different Asian cities give us optionality. We are not in a hurry to acquire land in any particular market, and will only invest selectively if the projects are able to yield attractive risk-adjusted returns.

Keppel Land maintains a quality portfolio in Singapore, including The Garden Residences in Serangoon North and two more residential plots in the Keppel Bay precinct. We are also looking to redevelop Keppel Towers and Nassim Woods when the conditions are right, and these can potentially add over 400 homes in prime locations to our Singapore portfolio. We will therefore remain disciplined when bidding for new sites.

While cooling measures in China have dampened short-term housing demand, fundamentals in the medium to long term are still encouraging on the back of urbanisation trends and rising income levels. We are positioning ourselves to capture more opportunities by selectively expanding and deepening our presence in high-growth regions and cities where there continue to be good demand for quality housing and commercial developments. We will focus in particular on the Jing-Jin-Ji region, Yangtze River Delta, Greater Bay Area and the Chengdu metropolis, where we see considerable growth potential. The cities which we have recently invested in, such as Chengdu, Nanjing and the Sino-Singapore Tianjin Eco-City, have healthy supply-demand dynamics, and a home supply absorption rate of 5.3 months on average over the past five years.

Apart from Singapore and China, Vietnam is another promising market that is driven by urbanisation trends. As a pioneer foreign developer with an established presence and prime landbank in Ho Chi Minh City, Keppel Land is well positioned to tap the growth of this vibrant property market, where the cost of land is still relatively low in proportion to the total cost of development.

A

Our investment in M1 has generated good returns for the Group. We have received $737 million in distributions and capital gains over the years, on an investment of $170 million. We believe that there is continuing value that can be derived from M1 but this would require significant efforts to realise, amidst the fast-changing landscape and an increasingly competitive telecommunications sector.

Following the privatisation of M1, we will work with Singapore Press Holdings (SPH) and M1’s board and management to drive the needed business changes that will enable M1 to compete more effectively. These long-term changes would include digital transformation, cost management initiatives in both front and back-end operations, growth initiatives into new market segments and optimisation of the balance sheet to unlock value.

M1’s connectivity solutions will be an important tool to power some of our other businesses, such as data centres, urban solutions and even our shipyards. M1 also complements our growing B2C business, giving Keppel access to a wider consumer market, and allowing us to offer services through a common digital platform. Already, Keppel Electric and M1 have been working together to bundle their power and mobile services for consumers.

With increasing demand for integrated data centre solutions supported by subsea cables and 5G connectivity, the growth of smart cities and the proliferation of mobile usage, there will be many meaningful touch points with M1 across Keppel’s businesses where synergies can be harnessed.

A

2018 was an active year for our asset management business as it continued on its expansion drive, seeking out new markets and asset classes for long-term growth. Notwithstanding a few divestments by Alpha Investment Partners (Alpha) during the year, Keppel Capital’s total assets under management (AUM) remained stable at about $29 billion as at end-2018.

Paving the way for growth, Keppel Capital announced acquisitions worth over $2 billion, and seized organic and inorganic opportunities to grow our asset portfolio. The new initiatives include the acquisition of industrial infrastructure company Ixom, the proposed purchase of a 50% stake in leading US senior living operator Watermark Retirement Communities, as well as the setting up of new funds for education-related real estate and Australian retail properties. In January 2019, Alpha also closed the US$1.1 billion Alpha Asia Macro Trends Fund III, 10% above its initial target.

We are excited by the many growth opportunities as Keppel Capital progresses towards its AUM target of $50 billion, leveraging the Group’s core competencies to create innovative investment solutions and connect investors with high-quality real assets in fast growing sectors fuelled by urbanisation trends.

A

Both recurring income and gains from revaluations, major impairments and divestments (RID) are important sources of earnings for a multi-business group such as Keppel, which runs a combination of asset light and asset heavy businesses, and owns investment properties.

The nature of Keppel’s business is such that we would regularly recognise gains from RIDs, even though they are inherently lumpy. On average, RIDs contributed some $260 million annually to our net profit over the last five years.

Unrealised profit, in the form of revaluation gains on our investment properties, is an important aspect of our RIDs. These revaluation gains are realised only when we divest the assets. For example, we recognised $401 million in revaluation gains from Phase 1 of Marina Bay Financial Centre, Singapore, over a period of two years from 2009. When we divested the office development to Keppel REIT for about $1.4 billion in 2010, we realised a significant part of the revaluation gains after adjusting for Keppel Land’s stake in Keppel REIT.

Like recurring income, gains from RIDs are a consistent feature of the Group’s earnings and are included in our dividend distributions. For FY 2018, we would be paying out 48% of our total net profit, excluding the special cash dividend of 5.0 cents per share distributed to commemorate Keppel’s golden jubilee.

Therefore, even as we grow recurring income to improve the overall quality of earnings, we want to ensure that we continue to turn our assets efficiently to realise value and achieve our desired mid-teen ROE target for the Group in the long run.

A

To thrive in this fast‑paced environment, we need to be entrepreneurial and innovative, quick to seize opportunities while staying disciplined with risk taking. As we keep a watchful eye on new developments and potential disruptions to our businesses, we are also building resilience through our self-sustaining business model and strengthened governance processes.

We see sustainability as essential to Keppel’s long-term success. Our goal is to run a profitable, safe and responsible business providing the best value proposition to customers, while being guided by our core values and operating principles.

To ensure we have the license to operate as a global company, we need also to carefully consider the environmental, social and governance issues when determining our strategies and policies. In May 2018, Keppel Corporation became a signatory of the United Nations Global Compact. We are committed to upkeeping the Compact’s 10 universal principles on human rights, labour, environment and anti-corruption, all of which resonate strongly with our own core values.

We will continue to strengthen our compliance policies and procedures to ensure that we win business legally and ethically. Notably in 2018, Keppel O&M’s entities in Singapore achieved certification for the ISO 37001 Anti-Bribery Management System. We will be rolling out the ISO certification programme to Keppel O&M’s overseas entities, and are also looking to extend it to other business units in the Group.

As we foster a dynamic environment for collaboration, innovation and the creation of synergies and economic benefits for all our stakeholders, we are also grooming a new generation of Keppelites who are committed to our values and mission. We will create a conducive workplace where Keppelites, regardless of gender, ethnicity or age can explore, develop and fulfil their professional aspirations as we take the Group into the future.