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Keppel Corporation Limited ADR (OTCPK: KPELY) Second Quarter Results Teleconference 2018 July 19, 2018 5:30 AM ET
Senior Managers
Ariel Tee – Executive Group, Corporate Communications
Loh Chin Hua – Director General Officer
Hon Chew – Chief Financial Officer
Chris Ong – General Manager
Analysts
Gerald Wong – Credit Suisse
Siew Khee – CIMB
Donald Chua – Merrill Lynch
Zhiwei Foo – UOB
Conrad Werner – Macquarie
Sheryl Lee – UBS
Ariel Tee
A very good evening, ladies and gentlemen. We welcome all of you, including those who display this trust on the Web, to the Keppel Corporation Second Quarter and First Half Financial Results Conference for 2018.
First, allow me to introduce the members of our panel. Seated from left to right: Mr. Thomas Pang, Chief Executive Officer, Keppel Telecommunications & Transportation; Mr. Chris Ong, Chief Executive Officer, Keppel Offshore & Marine; Mr. Chan Hon Chew, Chief Financial Officer of Keppel Corporation; Mr. Loh Chin Hua, Chief Executive Officer of Keppel Corporation and simultaneously Executive Chairman of Keppel Land; Mr. Ong Tiong Guan, Chief Executive Officer, Keppel Infrastructure; and Christina Tan, CEO of Keppel Capital.
Our CEO, Mr. Loh Chin Hua, will first discuss the activities and prospects of the group. Later, our Chief Financial Officer, Mr. Chan Hon Chew, will present the group's financial results. This session will be followed by a Q & A session on business performance chaired by Mr. Loh. Without further ado, I would like to invite Mr. Loh Chin Hua to make his opening remarks. Mr. Loh, please
Loh Chin Hua
Thank you, Ariel. Good evening and welcome to the conference and webcast on our results and performances in the second quarter and first half of 2018. August 3 marks the 50th anniversary of Keppel Corporation. Over the past five decades, starting from a small shipyard, the group has grown, diversified and transformed to seize opportunities and overcome the myriad challenges of our growth.
Today, Keppel is an ecosystem of societies working together on sustainable urbanization. That it is about energy research across our platforms, providing solutions for gas or renewable energy, reliable infrastructure such as electricity , waste or energy, water treatment facilities or high quality to meet the needs of the markets.
Our multi-business strategy and geographic diversification have allowed the company to remain resilient despite cyclical headwinds in some of our businesses. For the first six months of 2018, we achieved a net profit of $ 583 million, up 38% over the same period in 2017. Our group continued to post solid results in the first half of the year. 2018 despite constant challenges in the O & M sector
The economic value added for the period was $ 275 million. On an annualized basis, our return on equity was 9.9%. We had cash inflows of $ 886 million in the first half of 2018 compared with $ 204 million in the first half of 2017. Our net debt ratio was 0.4 at the end of June 2018 compared with 0.46 at the end of December 2017. We paid $ 254 million to shareholders in May. 2018 as the final dividend for the 2017 fiscal year.
Given the group's performance, including the improvement in our cash flow and net debt, the board approved a dividend interim $ 0.10 per share for the first half of 2018 $ 0.08 per share for the first half of 2017. In addition to thanking the shareholders for their trust and support on the occasion of the 50th anniversary of Keppel Corporation we will distribute a special dividend of $ 0.05 per share. The interim dividend and the special dividend will be paid to shareholders on August 7, 2018.
We remain focused on improving the overall quality of our results. Recurring revenue contributed $ 130 million, or 22% of our net income in the first half of 2018. The operating and maintenance industry is becoming more optimistic, the Brent price exceeding US $ 70 per barrel. However, the rigging market continues to be plagued by an oversupply. The use of the platforms has improved, but the daily rates have remained stagnant. Nevertheless, in regions such as the UK sector of the North Sea, the Middle East and Southeast Asia, we are seeing more call activities from all over the world. offers. In Brazil and Mexico, international oil companies are also expected to increase their investment in the oil and gas sector. There has also been an increase in the number of floating production projects awarded in the past year.
In June of this year, the EMA estimated that there were 235 projects at various stages of study potentially requiring floating storage system production. Of these, 62 are in the tender phase for the final design phase. In summary, the recovery of the operations and maintenance sector is expected to continue, but at an accelerated pace. In a difficult environment, our O & M division recorded a net loss of $ 40 million, compared to a net income of $ 11 million in the first half of 2017.
This is mainly due to the decrease in the volume of work, lower taxes in overseas operations. Keppel O & M has significantly reduced overhead costs in recent years due to the significant upgrade that it has undertaken. This allowed the company to generate operating income of $ 14 million in the first half of 2018 despite the lower workload.
At the end of June 2018, we obtained more than $ 1.2 billion in new orders, slightly more than new orders. secured for the whole of 2017. In the second quarter of 2018 alone, we concluded contracts worth $ 618 million. The new contracts included two new jackups for Borr Drilling as part of a 5 rig contract for a total of US $ 745 million, two bi-fuel dredges for Van Oord, a bunker bunker for Sinanju, and 39, an LNG bunkering vessel for FueLNG, our joint venture with Shell.
Keppel O & M's net order book stood at $ 4.6 billion at the end of June 2018, excluding Sete Brasil projects compared to $ 3.9 billion at December 31, 2017. Since 2014, Keppel O & M's net backlog has increased for two consecutive quarters. During the first six months of 2018, Keppel O & M delivered an FPSO, a dual-fuel LNG tug and two self-locking tires to Borr.
Hilli Episeyo, the world's first converted floating liquefaction vessel, which Keppel developed in partnership with Golar complete commercial operation off Cameroon. This has boosted market confidence in the conversion approach, which adds value through a shorter lead time for the first LNG production and competitive prices. Since 2015, we have gained approximately $ 1.8 billion in orders for our gas solutions, which represents approximately 38% of all new orders. Keppel aims to be the preferred partner of the gas industry.
The increasing adoption of LNG as a marine fuel, which stimulates demand for new builds, conversions and upgrades, also bodes well for the company. The division is also actively seeking opportunities in production assets, specialized vessels, gas solutions, floating infrastructure and offshore renewable energies. Our Real Estate division achieved net income of $ 603 million in the first half of 2018, more than three times the $ 192 million realized in the first half of 2017, supported by bulk sales and higher sales in Singapore and China . In line with our capital recycling strategy, Keppel Land announced the sale of two block residential developments in Shenyang and a stake in Quoc Loc Phat in Vietnam for a total consideration of $ 350 million. We also announced the sale of a commercial project in Beijing for $ 396 million. The option is expected to be exercised in the third quarter of 2018.
In the first half of 2018, our real estate division sold approximately 1,420 homes, for a total sales value of approximately $ 770 million. These include 800 homes in China and 130 in Singapore. The real estate market in Vietnam remains promising and we expect more homes to be sold in Ho Chi Minh City as new projects are launched later this year. We also received a positive response on other markets such as Indonesia and India, where we sold respectively 150 and 225 homes.
In addition to these sales, we also sold three residential projects in Zhongshan and Shenyang in the first half of 2018, which equates to 11,100 additional homes sold as a block. We expect to record profits from the sale of some 6,900 overseas properties worth approximately $ 2.4 billion, which will be recognized from the third quarter of 2018 to 2021.
In our residential pipeline, we have about 50,000 houses, of which 16,000 are ready to be launched by the end of 2020. In our commercial portfolio, we have about 1.5 million square meters of area gross floor area, of which about two-thirds is under development. As commercial projects are gradually completed, they will provide a regular recurring income to the group.
For more than 20 years, the group has developed regionally and invested in key Asian markets. In some cities, we enjoy a first-mover advantage and have built an important land bank. We are in an enviable position where we have many options in a number of markets, which helps us mitigate the impact of cooling measures, whether in China or Singapore. China and Vietnam are key markets for the business, where rapid urbanization and a rapidly growing middle class are driving demand for high quality housing.
In recent years, we have focused our attention on five key cities in China. namely Beijing, Shanghai, Tianjin, Wuxi and Chengdu. Based on our experience and experience in these cities, we intend to expand our presence in the Jing-Jin-Ji area, with Beijing and Tianjin as targeted cities, the delta region Yangtze with Shanghai and Wuxi as target cities. Chengdu Metropolis
We are also actively exploring opportunities in the Greater Bay area with Guangzhou and Shenzhen as target cities. In Ho Chi Minh City, Vietnam, we will also explore opportunities along the eastern and southern corridors, which are supported by investments in infrastructure. We will continue our efforts to accelerate the transfer of assets. Keppel Land is evolving to become a multi-faceted developer that does not only focus on land acquisition and home building, but also on the development of a portfolio of sterling commercial properties.
We may also acquire completed assets generating cash flow. value through asset enhancement. The Infrastructure Division continues to grow as a stable pillar of profits. It achieved a net profit of $ 66 million, up 16% from one year to the next, mainly due to the dilution gain arising from the Keppel DC private placement exercise. REIT and higher contributions from Environmental Infrastructure and Infrastructure Services. New projects under development are progressing regularly.
KMEDP, for which Keppel Infrastructure has a 25-year water purchase contract with the PUB, is almost 50% complete; while HKIWMF is in the design and engineering phase and is expected to contribute to our bottom line as of next year. Stable and recurring revenues from infrastructure services generated revenues of approximately $ 70 million in the first half of 2018. This trend is expected to continue with the start of operating and development contracts. long-term maintenance for KMEDP in 2020 and HKIWMF in 2024.
In our Data Center activity, several transactions are in progress and we will share the details once finalized. Our investment division recorded a net loss of $ 46 million in the first half of 2018 compared to a net income of $ 163 million in the same quarter last year due to the share of losses of associated companies and losses. fair value on investments. Unlike the first half of 2017, there has been no sale of land in the Sino-Singaporean eco-city of Tianjin this year.
Keppel Capital continues to make regular contributions to the group and seek base-based expansion opportunities, focusing on areas that leverage Keppel Group's capabilities. Meanwhile, Keppel DC REIT has acquired Keppel DC Singapore 5, which will increase its presence in Singapore to nearly 300,000 square feet of total leasable area
With this addition, Keppel DC REIT's assets under management will increase to around 1 , $ 94 billion with 15 data centers in Asia-Pacific and Europe. The first half of 2018 also allowed us to actively look for opportunities to advance our integrated master development business under Keppel Urban Solutions. In April, Keppel Corporation signed a memorandum of understanding with Filinvest Development Corporation to explore opportunities for cooperation in smart and sustainable urban development projects in the Philippines.
To expand its range of solutions, Keppel Urban Solutions has also signed a memorandum of understanding with Singapore Technologies Engineering. last week to leverage the expertise and resources of everyone in the design and implementation of master plans and technologies for smart cities. This includes the customization and application of ST Engineering's solutions at Saigon Sports City in Ho Chi Minh City.
Starting with Vietnam, where Keppel has a strong presence and a history, the partnership can also be extended to other markets. This year we are also celebrating the 10th anniversary of the Eco-City Tianjin Sino-Singapore. During her visit to Eco-City earlier this month, Singapore Deputy Deputy Prime Minister Teo Chee Hean attended the launch of the city center, which marks a new face in the development of Eco-City. City. and a wider range of amenities, we expect the Eco-City to become more and more attractive, both for businesses and residents, and to continue to be a long-term contributor to the Group. Keppel. Our joint venture, SSTEC, plans to continue sales of land in the second half of the year to meet the strong demand for homes in Eco-City.
In conclusion, the Keppel Group is working hard to seize opportunities, not only vertical growth, but also through close collaboration between our business units that we provide solutions to meet the needs of the business. sustainable urbanization. Reflecting our commitment to not only doing well, but also doing good, Keppel Corporation became a signatory to the United Nations Global Compact in May
We have also made a public commitment to the actions that the group will undertake to fight against climate change. . We are determined to make a positive impact on the community wherever we operate. This is how Keppel goes from the front and shapes the future.
I now invite our chief financial officer, Hon Chew, to present the financial results of the group. Thank you
Hon Chew
Thank you, Chin Hua, and good evening everyone. I will now present the financial performance of the group. In the second quarter of 2018, the group posted net income of $ 246 million, up 44% from the same quarter last year. As a result, earnings per share increased to $ 0.136, and EVA was $ 89 million positive versus a negative $ 34 million in the same quarter last year.
Then the summary income statement of the group. The group's second-quarter business figure was 2% or $ 31 million lower than the same quarter of last year. Lower revenues in the Real Estate and Investments divisions were partially offset by higher revenues in the Offshore & Marine and Infrastructure divisions. Despite a decline in revenues, the group's operating profit increased 72 percent, from $ 108 million to $ 257 million, thanks to bulk sales of development projects in China and Vietnam
. lower margin of 31%, mainly due to the lower share of profits of associates. After taxes and non-controlling interests, net income increased 44% to $ 246 million, giving earnings per share of $ 0.136.
In the next slide, we look more closely at the income of the group by division. In the second quarter of 2018, the group achieved total revenues of $ 1.52 billion, down 2% from the same quarter last year. The Offshore & Marine division reported a 35% increase in revenue as a result of the recognition of products related to self-elevating platforms sold to Borr Drilling Limited, partially offset by lower workload. . % lower due to lower revenues from projects in China, Corals to Keppel Bay and Highline Residences, which was sold, as well as the lack of revenue from The Glades compared to the same quarter Last year. The Infrastructure Division recorded 24% revenue growth as a result of increased sales in the energy and gas sector and the gradual recognition of revenue from the plant. desalination of Keppel Marina East. The group reported pre-tax income of $ 281 million for the second quarter of 2018, 31% higher than last year. The pre-tax loss of the Offshore & Marine division is $ 11 million compared to $ 15 million in the same quarter of 2017. This decrease is mainly attributable to the low earnings of the Marine & Marine Division. partly offset by higher profits of associated companies. Last year, pre-tax income from Offshore & Marine also benefited from a $ 12.6 million gain on the Keppel Verolme disposal.
The Real Estate division recorded a $ 122 million increase in pre-tax profits. Seasons in Shenyang, Hunnan Project in Shenyang, and Quoc Loc Phat Joint Stock Company which owns land in the new Thu Thiem urban area in Ho Chi Minh City and the Nassim Woods surplus, which has been designated for redevelopment in the sale.
These are partly offset by a smaller contribution from real estate projects. The Infrastructure Division reported a 26% increase in pre-tax earnings as a result of the change in ownership in Keppel DC REIT and higher contributions from environmental infrastructure and infrastructure services, partially offset by the lower contribution. of energy infrastructure and the loss share of Keppel Infrastructure Trust. The Investment Division recorded a $ 39 million decrease in pre-tax income due to associates' share of losses in the current period compared to the income share of the corresponding quarter in the current period. 39, previous year. After taxes and non-controlling interests, the group's net income increased by 44% or $ 35 million, with the Property Division being the largest contributor to the group's results, followed by the Infrastructure Division.
I will now tell you about the first half performance of 2018. Compared to the same period last year, net profit for the first six months was 38% higher than $ 583 million. Earnings per share increased by the same amount, $ 0.322. The annualized ROE also rose to 9.9%, while the EVA was higher at $ 275 million. Free cash flow for the period was $ 886 million, compared with a $ 204 million contribution in the first half of 2017. This result is mainly attributable to the proceeds from block sales of properties under development [19659055]. 0.6 times at the end of 2017 to 0.4 times at the end of 2018. We are pleased to announce a provisional dividend of $ 0.10 per share for this year as well as a special dividend of $ 0.05 per share to commemorate Keppel's 50th birthday.
Next, the summary of the group's profits and losses. The group achieved a total business turnover of nearly $ 3 billion in the first half of 2018, an increase of 7% or $ 191 million compared to the same period last year. Higher revenues from the Offshore & Marine and Infrastructure divisions were partially offset by lower revenues from the Property and Investment Divisions. Operating profit was $ 725 million, up 118% or $ 392 million from the same period last year. Higher earnings in the Property and Infrastructure divisions were partially offset by lower earnings in the Offshore & Marine and Investment divisions.
Earnings before taxes of $ 711 million, however, increased by 41%, mainly due to lower earnings. associates. In the first half of last year, the group benefited from the sale of three Tianjin Eco-City Sino-Singaporean land parcels as well as from gains from the sale of equity interests in real estate projects. in China. After taxes and non-controlling interests, net income increased 38% to $ 583 million, as earnings per share rose 38% to $ 0.322
In the next slide, we examine more near the income of the group. In the first half of 2018, the group achieved a total business turnover of nearly $ 3 billion, up 7% from last year. Offshore & Marine reported an increase in revenue primarily due to the recognition of products related to self-elevating platforms sold to Borr Drilling Limited, partially offset by lower work volumes. Real estate revenues decreased 2% mainly due to lower revenues for hotels and resorts as well as real estate segments. Infrastructure revenues increased 23%, mainly due to higher sales in the energy and gas sector and the gradual recognition of revenue from the plant. Keppel Marina East Desalination Project
. The group recorded a pre-tax profit of $ 711 million for the first half of 2018, 41% more than the same period last year. Despite the Offshore & Marine division, pre-tax losses were $ 26 million compared to pre-tax earnings of $ 30 million last year, due to lower operating and operating profits. the contribution of associated companies. As previously mentioned, pre-tax income from Offshore & Marine also benefited from a $ 12.6 million gain on the Keppel Verolme disposal.
The division's operating margin for the first six months was 1.5% versus 3.5% last year. In Real Estate, pre-tax earnings increased 198% primarily due to the block sale of development projects in China and Vietnam, the fair value revaluation of Nassim Woods and higher contributions to projects real estate. The increase was partially offset by the decline in the share of profits of associated companies
The pre-tax income of the Infrastructure Division was relatively stable at $ 74 million. The Investment Division recorded a pre-tax loss of $ 35 million compared to a pre-tax gain of $ 185 million last year due to the absence of reversal of the provision for impairment and the loss of income. losses of associated companies in the first half of 2018 compared to the share of earnings in the same period last year. This is mainly due to the lack of sale of three plots in the Sino-Singaporean eco-city of Tianjin.
After taxes and minority interests, the group's net income increased by 38% or 583 million being the main contributor to the group's results, followed by Infrastructure. The group's net income of $ 583 million for the first half of 2018 is reflected in earnings per share of $ 0.322. In the first half of 2018, our annualized ROE increased to 9.9%. As previously mentioned, our temporary and special cash contributions to our shareholders for the period will be $ 0.10 per share and $ 0.05 per share respectively.
Cash flow from operations was $ 325 million in the first half million in the same period last year. After taking into account changes in working capital, interest and taxes, net cash provided by operating activities amounted to $ 357 million compared to $ 127 million last year, mainly due to lower working capital requirements. Income from investing activities amounted to $ 529 million, consisting of proceeds of $ 833 million from sales and dividends from associated companies, partially offset by net repayment of advances from associated corporations of $ 239 million. millions of dollars. As a result, cash inflows totaled $ 886 million in the first half of 2018, compared with a contribution of $ 203 million to $ 204 million last year.
This brings us to the end of the results presentation segment. and I will give time to our CEO, Mr. Loh Chin Hua, for the Q & A section. Thank you
Loh Chin Hua
Thank you, Hon Chew. So we come to the Q & A section. As my colleague explained earlier, if you can, please raise your hand, indicate your name and we are happy to answer any questions you may have. For those of you who are watching online, we are also happy to answer questions on the internet, but let me start with those who are present with us today. Questions from the room? Yes, Gerald?
Q & A session
Q – Gerald Wong
Hello, Gerald from Credit Suisse. Two questions from me. First, in the Property Division, are there any changes to your plans for the residential launch pipeline given the recent cooling of the building? Remarqué que vous avez reconnu un gain sur le réaménagement de Nassim Woods. Deuxièmement, sur la division Offshore & Marine, voyez-vous plus de demandes pour votre solution de conversion FLNG après la livraison de la première unité? Et aussi, des mises à jour sur les deuxième et troisième unités? Thank you.
Loh Chin Hua
Merci pour les deux questions, Gerald. Je vais répondre à la première question et je demanderai à Chris de commencer à réfléchir à la façon dont il répond à la deuxième question. Je pense que les mesures de refroidissement des propriétés qui ont été annoncées, je pense, la semaine dernière, se jouent encore. Nous nous attendons à ce qu'il y ait un impact sur les sentiments du marché. Nous avons quelques propriétés dans notre banque foncière. Vous avez mentionné Nassim Woods. Nous avons également Keppel Bay Towers. Ce sont des projets de réaménagement. Donc, en fait, nous avons des options quand nous choisissons de lancer. Je pense qu'il est trop tôt pour faire des commentaires sur la question de savoir si nous allons changer ces plans, mais, manifestement, nous surveillons l'évolution du marché. Comme je l'ai mentionné, nous avons certaines options en ce qui concerne le moment où nous choisissons de lancer. Nous surveillerons donc le marché de près. Chris?
Chris Ong
D'accord, pour répondre à la question sur l'enquête sur les FLNG, je pense que Hilli a réussi à susciter la confiance et l'intérêt pour la solution de conversion sur le marché. Je pense que cela a littéralement éliminé le risque technique dans la solution elle-même. Quant aux deux autres, Gandria et GIMI, pour Gandria, l'avis de procéder a été prolongé jusqu'à la fin de l'année pour que Golar et Ophir recherchent des investisseurs alternatifs. En attendant, le navire est dans la cour, et nous faisons des travaux préparatoires. Pour GIMI lui-même, nous travaillons en étroite collaboration avec Golar et BP, et nous nous attendons à ce que l'avis soit donné d'ici la fin de l'année.
Loh Chin Hua
Je pense que a dit. Je pense que l'opération commerciale pour Hilli a donné au marché, comme je l'ai mentionné dans mes remarques, beaucoup de confiance. Nous sommes donc très confiants que ce marché de conversion FLNG serait très attractif pour KOM. Oui, Siew Khee.
Siew Khee
Bonjour. Siew Khee de CIMB. Pouvez-vous nous dire quelle est la plus-value de la juste valeur de Nassim Woods? Ma deuxième question est la suivante: pourriez-vous, monsieur Chew, nous dire quelle a été la contribution de Singapour et de la Chine à votre Division des biens? Et je pense que vous avez mentionné qu'il y a une certaine faiblesse dans le négoce immobilier. Donc, dans quelles villes en Chine, si je suppose que la faiblesse est en Chine?
Loh Chin Hua
Peut-être que sur la première question, je demanderai à l'honorable Chew de répondre. 19659071] Chan Hon Chew
Le gain à la juste valeur sur Nassim Woods lors de la désignation du terrain à réaménager est de 48 millions de dollars
Loh Chin Hua
pense que si vous regardez les ventes dans la première moitié de cette année, nous avons vu environ 800 unités en Chine. Cela se compare au premier semestre de 2017 d'environ 1 750 unités environ. Donc, il y a clairement une réduction. Mais nous nous attendons à ce que dans la seconde moitié, alors que nous mettons un certain nombre de nos projets prêts à être lancés, nous espérons pouvoir augmenter nos ventes. Je pense que les mesures de refroidissement ont eu un impact, mais cela a affecté différemment nos marchés. La plupart des marchés sur lesquels Keppel Land China est active où nous avons des projets, les fondamentaux de l'offre et de la demande sont encore assez positifs. La plupart de ces marchés auraient des jours d'approvisionnement, habituellement d'environ moins de deux ans de demande. Donc, nous sommes encore très – nous sommes toujours très positifs sur les fondamentaux.
Mais bien sûr, dans beaucoup de ces marchés, il y aura des mesures de refroidissement dont nous devrons nous occuper. Et je pense que c'est un avantage que possède Keppel Land, qu'au cours des 2,5 dernières décennies, grâce à notre dynamisme régional, nous avons accumulé beaucoup de capacités sur différents marchés. À mesure que les marchés deviennent de plus en plus sujets aux risques politiques potentiels et que les conditions du marché changent, certaines fenêtres s'ouvriront pour les marchés, d'autres fermeront. Donc, Keppel, grâce à notre équipe expérimentée dans des pays comme la Chine, le Vietnam, l'Indonésie, Singapour, pour n'en nommer que quelques-uns, nous donne l'optionalité de l'endroit où nous investissons et où nous lançons nos projets. Désolé, je ne peux pas te voir. Le gentleman, oui
Donald Chua
Voici Donald de Merrill Lynch. J'ai trois questions, alors s'il vous plaît, supportez-moi. La première question est un suivi sur les bois de Nassim. Pourriez-vous, après le gain de reval, quel est le coût implicite du terrain pour Nassim Woods maintenant? Je suppose également en tenant compte du DP potentiel pour remonter le bail à 99 ans. C'est la première question. La deuxième question concerne la vente de propriétés commerciales à Beijing. Est-ce que cela a été pris en compte dans les résultats du deuxième trimestre? Et si ce n'est pas le cas, quelle est la raison d'être de la vente de ce développement commercial à Beijing, car elle est encore en cours de développement? Pourquoi ne pas le garder pour un revenu récurrent? Et quels sont les gains que nous attendons en termes de TRI, de taux de capitalisation, et cetera? The third question is a broader one on capital allocation. With balance sheet now stronger, gearing is down, where are we looking at in terms of allocation? Is it more on the real estate side or other segments? And if it's on the real estate side, which areas are we looking at?
Loh Chin Hua
Well, you have quite a number of very big questions. We'll try to – I'll try to address some of them. I think on Nassim Woods revaluation, this is part of our activation of this site, to turn it into a land bank from where it was as a rental apartment. But as I shared earlier, we do have some optionality in terms of the timing, so we'll watch the market. I can't disclose what the land value is based on the valuation. All I can see is that we generally tend to be a little bit more prudent in how we revalue so that we don't get ourselves into a pickle.
As far as Beijing IDA concerned, it is not factored into the second quarter's results. We have a signed option with the buyer and there's a significant deposit that has been paid that is non-refundable. But – so we would expect the option to be exercised sometime in the third quarter. Good question, I think it's a – Beijing IDA is a – in a very prime location near the Third Ring Road on the eastern side of Beijing.
Ordinarily, we would have liked to keep it for the long term for recurring income, but this is a project that has also seen quite a lot of challenges for us to execute. And I think, in the best interest of the partnership, we thought it might be best that we sell. And of course, in the process, I think we have been fairly well compensated. I'm not sure, have we disclosed the profits? Did we disclose? We did. Do you? Sorry?
Okay. The profit was disclosed. Of course, this is subject to the deal being done. When we signed the option, I think in the second quarter when we made the announcement, I think the profit – expected profit is $140 million after-tax, yes? In terms of capital allocation, I think as a group, we do not generally do allocation top down. That can be dangerous. Of course, we have a general sense of where we – what we wanted – where we want to see our balance sheet being deployed. We tend to look at things more bottoms up, to see where are the best deals for the group that can provide the best risk adjusted returns. I think we do see a lot of opportunities or continue to see opportunities in the property side. We can replenish some of our land bank where it makes sense, when it makes sense.
We can also look at opportunities in the infrastructure side, at Infrastructure Division. I think with urbanization, there's a lot of requirements for different urbanization solutions. And of course, we also have opportunities in Keppel Capital. But Keppel Capital will be a bit less capital intensive. Those, we tend to work with third-party investors. D'accord? Yes, sir?
Zhiwei Foo
Hi, I'm Zhiwei from UOB. I have two questions and the first one on Property, second one on Tianjin Eco-City. For Property, I noticed that your quarterly revenue run rate has actually declined to about $200 million this quarter. Historically, your run rate was about $400 million, $500 million. And then if you were to exclude your one-off gains in the Property segment, your core profit for Property is about $48 million, which is also a quarterly decline. So with bearing all this in mind, how should we think about Property for the future? That's the first question.
Second question is on Tianjin Eco-City assets, TEC to be specific. There were no land sales, and I understand from the local media that it was because there were no bids received. Now so would you be lowering your bid in order to secure sales this year?
Loh Chin Hua
Okay. On the Property side, we look at the entire picture and – so that would include the en bloc sales because this, I think I mentioned before, this tend to be more opportunistic. We can choose to sell the units one by one or we could, where the opportunity arise, sell the project en bloc. So to us, there is also a sale. So we don't see that as a onetime gain. Of course, it is a bit more lumpier compared to a unit-by-unit sale. But just to be clear, even when we do unit-by-unit sale, I'm sure you are all well aware, for projects that are accounted for by the completion method, the reality of it is that it will still be lumpy. Meaning, at the end, we can only, assuming that we sell out during construction, we can only recognize the revenue and the gain when the project is completed.
So in that sense, from a financial point of view, there's very little difference. The only difference, of course, is we can't just rely on en bloc sales all the time. We still have to continue to look at property launches and selling the units the traditional way. On TEC, I think I had mentioned earlier that most of the markets that Keppel is involved in, in China, the supply/demand fundamentals are actually quite attractive despite all the cooling measures. And TEC is a very good example because the Tianjin Eco-City is now more mature, connectivity has improved. This year is the 10th year. Connectivity, as I mentioned, has improved. The amenities is also now quite broad, quite wide. So it offers quite a nice environment for residents.
Tianjin Eco-City is probably one of those markets that are quite – considered quite healthy. If you look at the supply-demand fundamentals, if you look at the land sales, land had been sold, land that is ready to be launched or projects that are ready to be launched, including the land sites that have been sold so far, the supply side represents about 1.2 times years in terms of demand requirement. So we think that there will be good opportunities for us to continue to sell land in Tianjin Eco-City.
As I mentioned in my remarks, we are expecting to launch – or SSTEC is expecting to launch some land sales in the second half. But I also shared last year, I think when we made our quite good profits, that Tianjin Eco-City is going to be a long-term contributor to the group, but it will be lumpy because the profits that will be realized, again, it will be done whenever we sell land. And it doesn't mean that every quarter, we will have land for sale. So it will be lumpy. You have a follow-up question?
Zhiwei Foo
Yes sir, I do. So to put it another way, last year, you were talking about the Tianjin Eco land – TEC land sales and how it could be potentially recurring. So given its lumpiness, should – conservatively, should we think of it as more of a less recurring nature?
Loh Chin Hua
I don't think that we ever put it that it is a recurring type of business. It will not be the same as what TG has in terms of operations and maintenance in the Infrastructure Division where it is a regular stream of cash flow or what Christina can generate in terms of asset management fees, which are also recurring in nature. But the basic business model of Tianjin Eco-City is that you will derive profit from generally two sources. One would be self-developments. So they will be like developing, and they will sell properties like Keppel Land China would, either by themselves or in joint venture with partners. So that would provide profit in development profit. The second part, which is equally important, is you will sell land. And when you sell lands to other developers, you will recognize the profit when the land has been sold. Maybe you want to give a chance to the others, okay? Yes?
Conrad Werner
Hi, Conrad from Macquarie. Maybe just following up on the recurring income issue. It was – it looks like it was down from $150 million to $130 million, half-over- half. Any reasons to be concerned about that? Can we make up some of the difference in the second half? Are there some trends there that need to be called out maybe to explain the decline? On the Borr revenues that were recognized, I think in the second quarter, were those – was there any margin on those revenues or were those zero margin type revenues? Just trying to understand the accounting there.
And then maybe just to follow up on the Tianjin Eco-City. Was it a case in the first half that you had land for sale and you just couldn’t get the price that you wanted and now you’re relaunching that in the second half at a lower price? I think that was the essence of the question asked before. Thanks.
Loh Chin Hua
Okay. I’ll ask Hon Chew to answer the first two questions.
Hon Chew
Okay. The first question, I believe, is on recurring income that dropped from $130 to $150 [ph]. The drop is largely on the O&M side. As you know, I think the O&M business is – has been facing quite a bit of headwinds. So that includes companies like flotels. So the drop in the recurring income is actually mainly the drop in our share of profit in flotel. So in terms of the underlying business, the number of vessels that are actually on charter this year is three compared to four last year. Second question…
Conrad Werner
On the recurring drop.
Hon Chew
Yes, I just answered the recurring…
Conrad Werner
Then the second one was on Borr, whether it…
Hon Chew
Okay. Borr is, I think, during the quarter, we announced the sale of five rigs. Those five rigs were actually sold at close to breakeven. Yes, so that’s why if you look at the revenue, it has gone up by quite a lot compared to last year, especially in the second quarter. But the revenues actually, if you look at the margin, is actually close to breakeven.
Loh Chin Hua
Okay. On your question on Tianjin Eco-City, Conrad, it’s a bit – it’s not so straightforward in terms of just tendering land for sale. I think because this is a – our Chinese partner is a government-owned entity. There are some processes that we had to go through and that includes having a valuation done before the land can be put up for sale.
So there was a site in the first half that was put up. But because the prices – land sale prices in 2017 were quite high and there was expectation that the prices would even go higher than the last transacted price, so that piece of land was put up at a fairly high valuation. So as a result, that particular site did not attract any bids. But it does not mean that there are no interest, as I said earlier. Tianjin Eco-City is maturing quite nicely and the supply-demand dynamics are actually quite positive. There’s a shortage of homes. There’s a strong demand – to meet the demand that we see there. So I’m quite confident that we will see land sales in the second half.
Sheryl Lee
Hi, it’s Sheryl from UBS. I have a couple of questions. Firstly, with regards to Infrastructure, could we get a sense of how much of the net profit was due to the dilution gains and how much is improved from contributions from the environmental business? And also some comments about what you see as a maybe sustainable or even growth level for the environmental business? The second question is with regards to O&M. Could we revisit the repair business and maybe give us an update of how we got – what size it is right now? What kind of revenue run rates we are seeing and the kind of vessels, which are being constructed? And just on the Property, could we just maybe get a total number that we can get a sense of, of the second quarter number? How much were all these gains on sales of the Shenyang sites, the Nassim Woods and the sale of the Vietnam investment company? Chin Hua
Loh Chin Hua
I think maybe, just a quick one to answer your last question. I think the gains for the Shenyang, the two Shenyang site as well as the gains from the en bloc sales in Shenyang, the two Shenyang en bloc sales and the sale of the stake in Ho Chi Minh City for that development land in Thu Thiem, I think we can provide that to you. It's already disclosed, publicly disclosed. As I mentioned earlier, the Nassim Woods revaluation, did we disclose?
Hon Chew
Yes. Just the Nassim Woods was $48 million.
Loh Chin Hua
$48 million.
Sheryl Lee
Sorry, just to clarify. So in the slides, right, you break it down between trading and investment property. So are they all sort of like…
Loh Chin Hua
Where are they sitting?
Sheryl Lee
Yeah. And then on the Vietnam side, you basically you announced it in two tranches. There was a first sale, then a second sale, but the second announcement was after the end of the quarter. So just to clarify that, that one also hasn't – the gains on that hasn't been put in, is that correct?
Loh Chin Hua
I think the gains for the Vietnam one was put in the net profit, or the net gains that was put in the second quarter, I believe.
Hon Chew
Yes. That’s correct.
Sheryl Lee
And both the sale?
Hon Chew
The whole thing, yes.
Sheryl Lee
The whole thing.
Hon Chew
I think you ask for the fair value gain is actually under the line item, other operating income.
Sheryl Lee
Okay.
Hon Chew
It's actually disclosed also in the SGXNet. You see the fair value gain on investment property of $48.3 million in the second quarter. So, that’s on the Page 2 of the SGXNet and that falls under the line item, other operating income.
Loh Chin Hua
Maybe, can I suggest, Sheryl, is it okay? You take it offline with the team.
Sheryl Lee
Yeah.
Loh Chin Hua
You had a question on O&M and repairs.
Sheryl Lee
O&M and also infrastructure.
Loh Chin Hua
Okay. Maybe, ask Chris.
Chris Ong
I think your question; I just want to be clear the question is about what is the status of the repair business. I think the repair business tool form a very staple type of workload within the yard and I think that for this quarter itself, we see a gradual increase in the number of inquiries for repairs. And we think that the volume should be able to sustain as usual as a baseload. That's mainly on the shipping side. And for rigs, we do have a steady volume of upgrades in the yard. But that one will be a little bit more muted, depending on whether the rigs are going on contract by the clients itself.
Sheryl Lee
May I just clarify how much of your revenue roughly is from repair now?
Loh Chin Hua
We don’t break that down in terms of different division.
Chris Ong
So coming back Sheryl, to your question on infrastructure, the dilution gain from – is about just under $20 million from the placement of new shares in Keppel DC REIT. On the Infrastructure side, we are seeing a Infrastructure side, we are seeing a very steady contribution from the Keppel Infrastructure as well starting to recognize EPC profits from the Marina Bay Desalination Plant, the Marina Desalination Plant. And we will expect that we will, as I mentioned in my speech, next year, with the Hong Kong IP, we will also start to recognize the EPC from next year. Then, of course, the point is that as each of these projects are completed and they go into long-term operations and maintenance phase, the O&M fees will keep on layering on top. Maybe I just ask TG to give an update on the two projects on their progress.
Tiong Guan Ong
For the Marina East Desalination Plant, we are about 50% complete. And for Hong Kong projects, we will start to recognize the contributions starting from next year. But from the operations of the environmental and services, their operating income for the first half was very strong. We have contributed about additional $50 million compared to last year. But last year, remember, we had a onetime gain of $12 million from Keppel GE. So the variance is not as big but from the operating level, it's quite a significant improvement.
Loh Chin Hua
Maybe I'll take a question now from the web, just to give people in the room some time to think of the next question.
First question is from Derrick Heng of Maybank Singapore. His question is, "How many land parcels will be put up for sale by SSTEC in second half 2018?". We generally don't disclose that. So as I mentioned, there will be plans by SSTEC to sell some land parcels in the second half.
Okay, this is a question from Somesh Agarwal of HSBC Singapore. "Of the $225 million profit in the second quarter 2018 in the Property Division, how much came from en bloc sales? Also, this is the second question, "Also, of the overall $603 million in the first half 2018 in the Property Division, how much came en bloc sales and fair value gain?" So maybe I think I give that to Hon here.
Hon Chew Chan
Okay. The first part of the question was for the second quarter. So the second quarter en bloc sales, as we mentioned, is from the two sites in Shenyang and one in Vietnam. So I think your question is on after-tax basis. So after-tax basis, the total is $111 million for the second quarter. As for the first half, this is also after-tax basis. En bloc sales, of course, first quarter, we had the sale of the Zhongshan marina. So including that one is a total $416 million for en bloc sales after-tax basis. As for the fair value gain, after-tax basis is $40 million. Thank you.
Loh Chin Hua
Another question from the room? I f not, I'll go back to the web. There's a question from Low Pei Han of OCBC Singapore. "Thank you very much for the opportunity. Will it be possible to provide your expectations in terms of timeline and ESP for the Garden Residences?"
For Garden Residences, we have launched it recently and the achieved price of the units that have been sold is about $1,645 per square foot. We have a bit of time because, as I mentioned, the Garden Residences was just acquired not long ago and we just launched it. In terms of looking at the ABSD deadline, that is sometime in 2022. So we do have – as I mentioned, we do have time. It's a good product, well located with very strong partners in both Keppel Land as well as Wing Tai. So the partners are confident that we will be able to achieve a good result.
Okay. There's a question from, Derek Tan – or two questions. "This is Derek Tan of DBS Singapore." His first question, "Where are the potential asset recycling opportunities within the property portfolio where management feel have achieved fair value?" Second question, "Will management be able to comment on the current IRRs for your Alpha funds if they are above hurdle rates and where you see further opportunities to grow AUM?"
I will take the first question and I will ask Christina to address the second question. On the first question on potential asset recycling opportunities, I think we are always, as part of our goal to make Keppel Land a multifaceted property player with a focus on achieving the highest returns, we have to look closely at the property book that we have to get the best returns. Over the 10 years to 2017, end 2017, the average ROE for Keppel Land per annum is about 10 point — sorry, 14.6%. So that is actually quite a good return. And we have also set a target of a true cycle return of about 12% ROE and this would be on fairly conservative gearing levels.
So it is important that we constantly look out for opportunities to turn our asset faster. But you must also remember that some of our assets, including our land bank, was acquired in some of these markets over quite a number of years ago. So where there's opportunities like what we've seen this year in Shenyang as well as in Zhongshan, especially if these are markets that are non-core to us and there's an opportunity for us to recycle, we will do so. Chris, you want to address — yes.
Chris Ong
Sure, okay. I think in terms of current IRRs for the Alpha funds, the Alpha funds have done well. I think we don't necessarily have to disclose all the returns because given that's private funds for the pensioners. But generally, I would say that some of you might have read in the papers potential sales and divestments and I think generally, we have performed well for the investors. And where we see opportunities to grow AUM, we are always looking to — looking at adding new geographies, looking at new partnerships and potentially new asset classes, so this could be the alternative asset space. We will announce some of these asset later when there are further details on it. Thank you.
Loh Chin Hua
Thanks, Christina. Any questions from the room? No. There's a question from a retail investor, Nicholas from Singapore.
Unidentified Analyst
Good evening Mr. Loh. Thank you for the good results. I have two questions. First question, with the property cooling measures implemented in Singapore, does Keppel Land foresee weaker profits in the coming quarters? Second question, any plans to IPO Keppel Land to unlock value for shareholders. Thank you.
Loh Chin Hua
First question, I think as I mentioned earlier, whilst we do expect the latest cooling measures to have an impact on sentiments, we are still monitoring. We're not — we will have to see how this turns out. But if you look at it overall, at least in the first half of 2018, the land sales — or sorry, the property sales, the home sales that we have for Keppel Land in Singapore is under 10% of the property sales for Keppel Land as a group. So Singapore is an important market, but as I mentioned earlier, because of our diversification to different markets like Vietnam and China and Indonesia, et cetera, it will not — it may not lead to a weaker profit immediately in the coming quarters. So I don't — so it's not a foregone conclusion that, that will happen.
Any plans to IPO Keppel Land, answer is no. Keppel Land is a core part of the group and it's working out very well in terms of how it has been able to contribute to the overall profits for Keppel Corp. And more importantly, I think under OneKeppel, we also see a lot of opportunities for us to unlock value as a group, working with different parts of our group like Keppel Urban Solutions as an example. Looks like we have answered all the questions, unless there's one last question from someone in the room. Any burning last question? If not, thank you very much for your attention.
Ariel Tee
Thank you, ladies and gentlemen, for joining us today. We've come to the end of our conference. Please enjoy the refreshments outside.
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