Keppel posts S$697.6m net loss for Q2 due to O&M impairments

MASSIVE impairments of S$919 million, reflecting a gloomy outlook for offshore and marine, pushed Keppel Corp to post a quarterly loss of S$697 million - its deepest quarterly loss in two decades - from a S$153 million profit a year ago.

While Keppel's chief executive officer Loh Chin Hua was quick to point out that the impairments were non-cash items and wouldn't hamper the firm's ability to secure funding in an uncertain, pandemic-hit environment, he admitted that as a result of the weak showing, Keppel has failed to meet certain pre-conditions for Temasek Holdings' S$4 billion pre-conditional partial offer for the conglomerate's shares.

"We believe that the 20 per cent threshold in the MAC (Material Adverse Change) clause has been crossed in terms of the net profit after tax, which means that the MAC pre-conditions in Temasek's partial offer has not been satisfied as of today," said Mr Loh at Keppel's results briefing on Thursday.

The latest development could become a huge overhang for the market, which up to last week, when Keppel issued a profit warning, had not paid any attention to the issue of potentially higher impairments in the offshore segment as a result of worsening conditions which could hurt Keppel's results and pose a risk to Temasek's offer.

The MAC pre-condition for Temasek's bid for control over Keppel includes thresholds for net profit after tax and net asset value, among others.

"However, we are unable to comment on the action that Temasek could take resulting from the non-fulfilment of this pre-condition," Mr Loh added.

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Excluding the impairments, Keppel posted a net profit of S$222 million for the quarter - up 45 per cent from S$153 million a year ago. Revenue came in 26 per cent lower at S$1.33 billion owing to lower contributions across its divisions as a result of "significantly lower level of activities" due to Covid-19 and the measures to combat the outbreak.

Keppel declared an interim dividend of 3.0 cents per share, down from the 8.0-cent dividend it had declared for the same period a year ago. The interim dividend will paid on Aug 20.

For H1 FY2020, Keppel's net loss amounted to S$537 million, hit by S$930 million of impairments from the Offshore & Marine (O&M) division. Excluding the impairments, it would have registered a net profit of S$393 million for H1, 5 per cent higher than a year ago.

Revenue for H1 stood at S$3.18 billion, down 4 per cent from a year ago. This was mainly due to lower contributions from property trading projects in China, power and gas sales, environmental engineering projects and asset management.

The O&M division reported a net loss of S$959 million for H1, reversing the net profit of S$10 million a year ago. Besides the impairments, Keppel's O&M Singapore workforce was reduced to about 1,200 persons for most of Q2, from about 24,000 in March 2020. The workforce has since risen to about 5,000 presently.

As at end-June 2020, the net orderbook stood at S$3.5 billion, which is expected to last the O&M division for at least two years.

Keppel's property division recorded a net profit of S$197 million for H1, 25 per cent lower on-year, due to the absence of divestment gains from Dong Nai Waterfront City in Vietnam and lower investment income.

Meanwhile, its infrastructure division recorded a net profit of S$252 million in H1, up from S$59 million a year ago, due to a mark-to-market gain of S$131 million from the reclassification of Keppel's interest in Keppel Infrastructure Trust from an associated company to an investment, alongside gains from selling Keppel DC REIT units.

The investments division sank into the red with a net loss of S$27 million for H1, reversing a net profit of S$25 million a year ago. This was mainly due to the absence of a re-measurement gain on previously held interests in M1, as well as mark-to-market losses from investments.

Mr Loh said that most of the company's businesses have remained resilient, underpinned by the essential services that it provides.

"However, due to the impact of the pandemic on the global economy and oil prices, we had to take significant impairments related to the O&M business. Without the impairments, Keppel's net profit for H1 2020 would have been higher year-on-year, even after including the loss of S$69 million by Keppel O&M," he said.

He added: "We will forge ahead in this difficult landscape, guided by our Vision 2030, a long-term roadmap which transcends the current crisis. Harnessing the Group's capabilities and synergy, I am confident that we can emerge stronger."