The Keppel Corporation

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1. Introduction 1.1 Objective of the assignment 1.2 Structure of assignment 2. Background of the assignment The assignment is based on the research of Keppel Corporation. Keppel Corporation is one of the largest conglomerates in Singapore and one of the world's largest builders of offshore oilrigs. The Keppel Group of Companies includes Keppel Offshore & Marine, Keppel Infrastructure, Keppel Telecommunications & Transportation (Keppel T&T) and Keppel Land, among others. 3. Concept of Shareholder Value Maximisation 3.1 Concepts: In recent years, shareholder value's creation becomes a very popular topic among top management. They think through creating shareholder value strategy, companies can gain large profits from it. But many of them misunderstand this concept. Shareholder value maximization is a kind of strategy for a long-term business operation. Totally different from maximizing profit, shareholder value maximization focus on identifying growth opportunities and building competitive advantage. So shareholder value maximization punishes short-term strategies that destroy assets and fail to capitalize on the company's core capabilities. There was a version of definition to define the shareholder value that the value delivered to shareholders because of management's ability to grow earnings, dividends and share price. In other words, shareholder value is the sum of all strategic decisions that affect the firm's ability to efficiently increase the amount of free cash flow over time. Theo Vermaelen, Professor of Finance at INSEAD argued that shareholder value is defined as the present value of free cash flows from now until infinity, discounted at a rate that reflects the risks of these cash flows, therefore, maximizing shareholder value is not the same thing as maximizing short-term profits, earnings per share or manipulating stock prices through accounting fraud. This is a mainstream opinion for most of experts in the world. But these arguments mostly concentrate more on what will shareholder value maximization bring to us? They ignore the definition on the premise of "who are shareholders". Many writers also have pointed out that a company has social and environmental responsibilities and that shareholders are not the only stakeholders in the business. These experts argued that some groups outside of stakeholders are also having long-term interests and relationships with a company. These are groups that mentioned as employees, customers, managers, suppliers and community. As we listed, almost all kinds of people relate to a company impact share price. So in that case, in the long term, shareholder value is the best strategy for all stakeholders. But it depends on the way managers create shareholder value. On the other hand, all shareholders are also very vulnerable in a short-run business due to a non-sustainable resources control. But in practice, managers who insist shareholder value maximization are always over-concentrated on the words of "maximization". Sometimes, when ethical problem were met, some managers even know what is wrong to social responsibility, they have to make more profits for stakeholders. And in businesses, entrepreneurs commonly consider this term as: managers try to gain the maximized profits to increase their companies share price by whatever ways can be done. And this version of definition is totally negative to compare with experts' theoretical argument. 3.2 Advantages: The opinion of shareholder wealth is tightly linked to the opinion of continued business expansion and profits. There are three advantages of maximization of shareholder wealth. Long-term Development Economists such as Bartley Madden and James Owens think of the maximization of shareholder wealth to be the natural result of profitable business activities. These are similar to capital expansion. These two specialists differ on this as the objective of all business, but the general opinion is that such expansion is what makes stockholders happy. This results in loyal stockholders, devoted board members and the endless increase in share value. The media attention of such performance generated can enhance the public reputation of any firm. Except maintaining happy shareholders and obtaining a powerful reputation, maximizing shareholder value has many advantages. It is very obvious that continuing profits, reinvestment and expansion make everyone happy. To Managers, salaries and reputations increase; to salesmen, commissions rise; to governments, more tax funds and more people are being hired to be staff at the expanding firm. These are all the segments of the advantage of long-term development of the firm. Employee Benefit There are situations in which a share increases when a company declares plan to fire employees, but observed over time this is the exception rather than the regulation. Generally, companies successfully increase share prices with growing and adding more employees, therefore benefiting society. Notice that many governments around the world, including U.S. federal and state governments, are privatizing some of their state-owned activities through selling these operations to stakeholders. Probably not surprisingly, the sales and cash flows of lately privatized companies generally enhance. In addition, studies show that these recently privatized companies have a trend to increase and therefore need more employees when they are managed with the objective to maximize share price. Social Contribution The owners of share are society to a large extent. More than seventy years ago, this was not correct, because most stock ownership was concentrated in a relatively small part of society, including the richest individuals. Since then, there has been explosive growth in pension funds, life insurance companies, and mutual funds. These organizations now own more than 60% of all shares, which indicates that most people have an indirect stake in the stock market. Furthermore, compare with only 32.5% of all U.S households own stock directly in 1989, now it’s more than 50% of that. Hence, most social members now have a significant stake in the stock market, no matter directly or indirectly. Thus, when a manager behaves to maximize the share price, this promotes the quality of life for millions of the general public. If a firm is continually growing, investing and expanding, everyone benefits. The concentration of corporations on maximizing shareholder wealth also potentially has several negative consequences. 3.3 Disadvantages The concentration of corporations on maximizing shareholder wealth also potentially has several negative consequences. Difficulties in Operation There are two basic and relevant criticisms of the maximizing shareholder wealth. One criticism is that it does not give staff enough incentive to realize high performance. The other is that it is difficult in operation – it doesn’t give employees and managers a guidance of what to do at an actual level. There are some reasons why shareholder value objective may not be desire. First of all, normally few of the employees are also members of shareholders. Secondly, the direct connection between their own specific occupations and the share prices of the company they cannot see. Thirdly, share prices often move because of macroeconomic elements and market drive¼Œuncorrelated to the administrative performance. Bad Business Practices One potential disadvantage of corporations to focus on maximizing shareholder wealth is that it can cause terrible or unsustainable business practices. Some managers misguide investors on purpose for making their firms appear more valuable than they truly are. Sometimes these behaviors are lawless, like those by the senior executives at Enron. Sometimes the actions are lawful, but they are taken to promote the current market price higher than its basic price in the short term. For example, introducing to the global crisis which start in the late 2000s, many financial organizations in the U.S. gave mortgages to borrowers, even they had poor credit in the expectations of making as much gain as possible. However these practices may have generated short-term profits, the consequent plenty of defaults and foreclosures finally caused banks to undertake enormous losses. In some situations, businesses participate in illegal or immoral activities, such as tampering financial information for enhancing shareholder wealth. Overmuch concentrate on shareholder wealth is generally utilized as an element that led to the recession that began in late 2007, which so called the "Global Financial Crisis." 4. Company valuation over the past 5 years: In order to assess whether Keppel Corporation has delivered shareholder value over the past 5 years, it is based on a company’s ability to generate cash flow now and future. By using three methods below, it will be estimated and explain clearly. 4.1: Net asset value The Net Asset Value is a calculation that determines the price of a share in a mutual fund. Stock prices change within minutes, sometimes-even seconds. The reason why we calculate NAV is that mutual fund of NPV is adjusted at the close of each business day, making it much easier for investors and brokers to track. Calculated as: NAV = Total Assets - Total Liabilities
2008 2009 2010 2011 2012
Fixed asset 5,890 5,430 5,120 4,080 559
Current asset 985,367 1,785,666 2,024,337 2,286,081 2,818,524
Current liability 712,205 425,017 415,421 504,160 542,175
Non current liability 305,608 5,377 504,934 504,936 1,504,932
Net asset value (26,556) 1,360,702 1,109,102 1,281,065 771,976
The net asset value of Keppel Corporation from 2008 to 2012 4.2: Price earning multiple The second method is Price-earning multiple. It is a valuation ratio of a company's current share price compared to its per-share earnings. The P/E shows the relationship between the stock price and the firm’s earnings, and it is the most popular metric of stock analysis. Calculated as: P/E = Market per share Earning per share
Average closing stock (Market price) EPS P/E ratio
2008 4.32 0.72 6.0
2009 8.26 0.70 11.8
2010 11.322 1.02 11.10
2011 7.735 0.91 8.50
2012 11.50 1.25 9.20
(http://www.dividendsranking.com/Keppel-Corp-dividend-yield.html) The price earning per share of Keppel Corporation has a fluctuation trend. However, there is an upward movement during 2008 to 2012 from 6.0 to 9.20. It increases 3.20. The fluctuation of the price earning per share may be due to the number changes of price per share and earning per share of each year. The price earning per share grows up dramatically at this time is from 2008 to 2009, which is 5.8. In contrast, the earing per share decreases from 0.72 to 0.70. To gain this significant increase, the price per share of Keppel Corporation also increases. On the next year, there is an increase slightly, which is 0.02. A higher price-earning ratio indicates that the market is more willing to pay for the earning of the company. It also suggests that investors are expecting higher earning increase in the future, and how fast company will recover its current share price per earning. It shows a good growth potential. On the contrary, the price earning per share slumps down from 11.10 (2010) to 8.50 (2011) before turning increase to 9.20 in 2012. The table above shows that there is a decrease from 1.02 (2010) to 0.91 (2011) so that, the price per share of firm also go down. The market doesn’t have much confidence in the future of share at this time. 4.3: Discounted cash flow: The discounted cash flow is a quantification method, which is used to assess the attractiveness of an investment chances. The Discounted Cash Flow analysis involves the use of future free cash flow protrusions and discounts them. Hence, it is to approach the net present value that is used to calculate the potential for investment. The free cash flow indicates that the cash left in the firm after paying all operating and mandatory expenditures such as interest, tax payment and investment expenses. With free cash flow, a firm is allowed to pursue chances that enhance shareholder value, develop new products, and pay shareholders. Free cash flow is calculated as: Operating profit + Depreciation – Interest – Taxes
2008 2009 2010 2011 2012
Operating profit 1,238,474 1,504,791 1,756,494 2,824,344 2,621,175
Depreciation 139,078 174,313 188,633 208,571 210,512
Interest 78,671 49,675 64,701 98,230 134,933
Taxes 288,030 347,875 580,632 443,574 500,619
Investment Expenditure 563,076 1,221,440 1,266,045 1,561,196 1,323,241
Free cash flow 447,775 60,114 33,749 929,915 872,894
From the result of free cash flow with the assumption of rate of return is 9%, which is depended on the average closing stock during 5 years; the discounted cash flow is calculated as: FCF1 Vo= The opportunity is considered to be a good one if the value reached at through the discounted cash flow analysis is greater than the current cost of investment. 4.4: Discussion of the Findings (compare with market) 5. Conclusion: References: http://www.dividendsranking.com/Keppel-Corp-dividend-yield.html
  1. Peter Doyle, 2nd edition, Value-based Marketing: Marketing Strategies for Corporate Growth and Shareholder Value.; 2008, Published by John Wiley & Sons, Ltd, The Atrium, Southern Gate, West Sussex, England.
  2. Theo Vermaelen, Maximising shareholder value: an ethical responsibility?; December 26, 2008¼Œwww.insead.edu¼Œavailable at¼š http://knowledge.insead.edu/csr/ethics/maximising-shareholder-value-an-ethical-responsibility-1840.
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