Keppel Telecommunications & Transportation (KPTT SP) - UOB Kay Hian 2016-09-21: Developer Of The Future Landscape

Keppel Telecommunications & Transportation (KPTT SP) - UOB Kay Hian 2016-09-21: Developer Of The Future Landscape KEPPEL TELE & TRAN K11.SI

Keppel Telecommunications & Transportation (KPTT SP) - Developer Of The Future Landscape

  • Keppel T&T’s Investment arm alone makes up 75% of the group’s market cap while its DCs are some of the best in the business, offering superior performance with ROIC in the high teens. There is huge growth potential in being a proxy to the growing digital economy and with the Alpha Fund, the rate of current DC development could double. 
  • Initiate coverage with BUY and SOTP target price of S$2.28, offering a 2016 dividend yield of 3.3%.



WHAT’S NEW

  • Initiate coverage on Keppel Telecommunications & Transportation (Keppel T&T).



INVESTMENT HIGHLIGHTS


Proxy to growing digital economy, including Big Data and cloud computing. 

  • Data centres (DC) form the core infrastructure on which the digital economy runs. Global growth in data traffic (2014-19 CAGR of 22%) will lead to DC traffic more than tripling.
  • Over the same period, driven by cloud computing, workloads in DCs will double while Big Data will grow data stored in DCs at a 30% CAGR. 
  • To put this into perspective, Singapore’s Smart Nation initiative could require 245 Olympic pools of square-feet rack capacity in 2019. Also, overall enterprise outsourcing trend will help demand for DCs like Keppel T&T’s.

DC growth and expansion through Alpha Fund and more. 

  • Keppel Corporation’s top management decision to set up the Alpha DC Fund (ADCF) and its collaboration with Keppel T&T’s DCs underline the growth and potential for DC development. With ADCF, the rate of DC development could double and is likely to snowball as DCs get divested and capital is recycled. 
  • The PCCW Global (PCCWG) collaboration also provides an opening into the Hong Kong market. 
  • Our forecasts have yet to factor in the upside earnings potential arising from these opportunities.

One of the best in DC business. 

  • Keppel T&T’s DCs offer superior operating returns vs peers with its ROIC in the high teens. Its proven track record of cost savings without compromising on quality has resulted in a strong tenancy network. This leads to longterm leases and high commitment rates as it is able to provide clients superior power efficiency vs the industry’s (PUE: 1.55-1.6 vs 2.6).

Current DC development rate sustainable regardless of expected 4Q16 asset divestment. 

  • As Keppel DC Singapore 3 nears fit-out in 4Q16, we expect Keppel T&T to spin it off. Even if this does not happen, its operating cash flow and existing balance sheet will be able to sustain one DC p.a. without spin-offs until 2018.

2016 yield of 3.3% assuming “sale of REIT manager” dividend. 

  • Historically, exceptional spin-off gains usually result in a special dividend. While we have not accounted for future spin-offs, Keppel T&T’s sale of 50% of the REIT manager to Keppel Capital is completed. As such, we expect 2016 dividend yield to hit 3.3%.


VALUATION/RECOMMENDATION

  • Initiate coverage with BUY and target price of S$2.28, based on a 10% discount to SOTP valuation, resulting in a 35.7% upside. 
  • For Keppel T&T, the value of listed entities in its investment arm alone is worth S$695.6m, or 75% of the group’s market cap. 
  • Also, we find DC peers trading at an average of 60x 2017F PE and note that Keppel T&T offers superior performance vs peers and high-teen returns on invested capital (ROIC) but we opt to apply a conservative 50% discount due to its listing in Singapore.




Edison Chen UOB Kay Hian | Foo Zhi Wei UOB Kay Hian | http://research.uobkayhian.com/ 2016-09-21
UOB Kay Hian SGX Stock Analyst Report BUY Initiate BUY 2.28 Same 2.28



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