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Address by Executive Chairman of Keppel Corporation Ltd
Mr Lim Chee Onn, on 30 Jan 2002
Keppel’s Ultimate Goal - Increase Shareholder Value
2001 turned out to be an even more difficult year than 2000. On top of the economic uncertainty that prevailed, political and security problems around the globe aggravated the challenging business environment.
It was against such a background that Keppel Corporation (KeppelCorp) accelerated its restructuring plan following the sale of our Banking and Financial Services businesses last August.
As a start, it might be worthwhile to recap the various milestones of our restructuring efforts to provide the backdrop for our business plans going forward.
It was on 24 July 2001, that KCL shareholders gave the KeppelCorp Board the general mandate to dispose of Keppel Capital Holdings’ shares. A fortnight later, on 7 Aug we announced our intention to privatise Keppel FELS Energy and Infrastructure (KFEI). This signalled the roll-out of our plan to revamp KeppelCorp.
Just over a week later on 16 Aug, the sale of Keppel TatLee Bank was completed. There was no turning back after this. We have sold a profitable business that contributed 50% to our bottom line. That was our “big bang” initiative to launch the new Keppel.
A series of events unfolded rapidly soon after that. We held the EGM to approve the privatisation of KFEI on 5 Oct and this privatisation was completed on 2 Nov. A month later, on 3 Dec, we announced the proposals to privatise Keppel Hitachi Zosen and Keppel Telecommunications and Transportation. We expect to hold the EGMs for their respective shareholders to approve these proposals on 7 Feb (KHZ) and some time in Mar (KTT) this year.
I shall not repeat the explanation given by Mr Teo Soon Hoe earlier of how we have utilised the funds we have raised from the divestment of our bank to focus on 3 key businesses – Offshore and Marine, Infrastructure and Property Development. Instead I shall outline how we intend to grow the new Keppel now that most of the pieces are in position.
Let me state clearly what our 3 strategic objectives are. We shall
- Focus on core competencies
- Deliver sustainable earnings growth
- Enhance shareholder value
What can shareholders expect from this effort to focus on our core competencies? We are committed to deliver earnings growth of 15% - 20% CAGR through 2003. This and the other financial targets will be quite a challenge for KeppelCorp against a backdrop of a languishing global economy. The ugly spectre of terrorism is far from being eradicated, disrupting businesses, and disorienting consumers and Congressmen alike, not entirely a conducive climate for a business seeking sustained earnings and growth.
Nonetheless we are confident of enhancing shareholder value by leveraging to the hilt assets that are not captured in our balance sheet but which KeppelCorp has grown over the decades, namely, our brand name, our management, our networks and our global presence. Achieving these financial targets will also further strengthen our balance sheet. A strong balance sheet will provide us with the flexibility and capability to capitalise on opportunities to grow our key businesses without having to fall back frequently on shareholders. It might be pertinent to note here that the privatisation of our 3 SBUs is funded from internally generated cash and divestments without calling on our shareholders.
There is nothing cosmetic about such privatisation efforts. We are ploughing back hard-earned surpluses to earn even better returns for our shareholders.
What then can we expect from each of our key businesses?
Offshore & Marine - Outlook
The outlook for our O&M business is good. The strong order book will underpin the Division’s performance. Despite a rather chequered rig utilisation rate around the various regions, we can expect a strong market in rig construction and upgrading as well as FPSO/FSO conversions which KHZ is well positioned to secure with its reputation as the shiprepair yard which has undertaken the largest number of conversions over the years.
We can expect some S$10m per annum improvement in revenue uplift and cost savings arising from the integration of KHZ with KFELS. For this reason we are working hard to bring about an early harvest through synergies.
Offshore & Marine - Global Reach
This chart shows our global presence in the Offshore & Marine industry.
Our goal is to entrench Keppel’s position as the global leader in the O&M business. We shall focus in the Gulf of Mexico and the North Sea where much of the world’s offshore production takes place. This is further implementation of our “near market, near customer” strategy.
We shall strengthen our offshore and marine equipment design capability to add to our arsenal of proprietary jack-up rig designs. This will enable us not only to increase our Offshore and Marine division’s margins but also will enhance our competitiveness in bidding for construction and fabrication projects.
Infrastructure
Network Engineering - Outlook
The Network Engineering unit’s revenue last year more than doubled that of year 2000. We expect revenue this year in 2002 to reach at least $500m.
Our order book is healthy, being close to $600m with the bulk of that consisting of contracts from repeat customers. This confirms our reputation as a reliable partner for telcos and equipment vendors who value ability to meet specifications and deliver on time much more than cost.
In the cable/broadband space, we anticipate an increase in market share in Europe through our subsidiary Echo Broadband, which already has a significant presence in Germany.
We are already the leading integration solution partner for Telcos in SE Asia for the rollout of wireless infrastructure. We have commenced marketing activities for such work in N Asia and other parts of Europe.
The chart shows our current global presence in the network engineering business.
Network Engineering – Growth Strategy
We are well positioned to offer our services to telcos when they outsource more network engineering work due to our good track record of working with them. This trend would also create opportunities for us to grow our team by acquiring the former in-house network engineering teams spun out from the telcos as they outsource more work.
We will also focus on growing intellectual capital by owning proprietary tools and technology to create high quality recurring business.
Our relationship with telcos and equipment vendors is good and we shall grow with them as they expand globally. Nokia has certified us as their outsourced service provider in the roll-out of wireless networks. We will leverage on such relationships with equipment vendors, and be their preferred partner for more Telco rollout activities. As it is, we have 50 staff members who have been certified by 5 vendors to handle their highly technical projects globally.
Since quite a number of people are quite unfamiliar with the network engineering business, I have arranged to circulate to you a short brief on what the business is all about and how we, in Keppel, are well-positioned to grow this key business by capitalising on the rapid technological changes in the telecom industry and the increasing trend for telcos and vendors to out-source network engineering work.
Infrastructure
Utilities Engineering - Outlook
Our focus this year will be to improve further the yield on our current plants in operation. We believe this experience will help us to participate more effectively and profitably in Singapore’s energy market liberalisation expected over the next 6-18 months.
The chart shows the locations of our power plants.
Utilities Engineering – Growth Strategy
We have been running an electricity marketing business in Singapore profitably since last year. Through this experience and that gained from operating the other plants, we will look to grow through acquisition of plants in other countries. We are exploring various financial structures to minimise the equity requirement for growing this business, a task which our strong corporate finance team within KeppelCorp is experienced in.
Property - Outlook
After a difficult year for the property sector in 2001, Keppel Land expects to see profits in 2002.
The local residential market has picked up and we will capitalise on this recovery to launch more residential projects later this year. Over the next few years, growth will also be generated from residential projects overseas, particularly in China and later in Vietnam.
In addition to improving sales, we will continue to improve our ROE and EVA by divesting our investment buildings. We have been exploring various ways that can achieve this most effectively and should be able to see results later this year.
Property - Growth Strategy
This strategy is to focus on property development for sale and fee-based property fund management. Our aim is to leverage on our expertise in project management, marketing, property management and our excellent network of partners in the region.
Prospects in emerging economies like China and Vietnam are good as increasing numbers of middle income residents seek to own new and better homes. The local policies in these countries are being changed to encourage home ownership and should augur well for Keppel Land which has a strong regional presence and a reputable brand in ASEAN and China.
Investments
My brief remark on this chart is that we are determined to seek out the best way to divest these businesses so as not to affect adversely shareholder value. I personally oversee the divestment programme through a top management committee which meets weekly to monitor prospects.
Organisation & Management
We now come to the most crucial factor of the new Keppel strategy – our organisation and management. I consider this to be the most crucial factor in the restructuring of Keppel’s businesses.
Apart from the expected changes in reporting structure and relationships, both amongst staff as well as between SBUs and the corporate HQ, we have shortened the reporting chain considerably. The aim is to give key business units faster access to resources and decisions.
Management staff will henceforth have their remuneration packages linked directly to achieving set performance targets, both personally and at the Group level. For the first time in Keppel’s history, all senior management’s bonuses this year have been determined by their personal performance and the Group’s profitability.
It has taken us well over a year to put the early pieces in place and we shall refine further the appraisal and performance schemes going forward. The emphasis is to identify, motivate, reward, develop and stretch. I believe we have made a good start as otherwise we would not have rolled out the privatisation exercises so quickly over the past 6 months. Many have asked me what the most crucial factor will be in our effort to increase shareholder value and sustain this growth. My answer is invariably “Finding the right person and place him in the right place to do the right thing”.
The last chart summarises the direction we are heading. The road map outlines our key efforts going forward.
Our ultimate goal is to increase shareholder value giving full cognizance to the assets we have in the Keppel Group and the constraints we face as a company.
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