KEPPEL TELE & TRAN
K11.SI
Keppel Telecommunications & Transportation (KPTT SP) - The Preferred Vendor For Tackling Cloud DC Shortage
- KPTT’s 3Q16 results came in largely in line as the stellar performance of the DC division was offset by the weak performance of the logistics and investment division.
- Going forward, we note a supply shortage for cloud DCs and we believe KPTT is the answer, with it being a preferred vendor in the sector.
- With the recent disposal of KDC SG 3 and the ADCF, KPTT is poised for tremendous growth.
- Re- iterate BUY with target price raised to S$2.36 on the back of brighter prospects.
RESULTS
3Q16 results largely in line.
- Keppel Telecommunications & Transportation’s (KPTT) 3Q16 results are largely in line with our expectation on a core earnings basis. 9M16 core earnings represented 73% of our full-year estimate.
- For 3Q16, they delivered S$69.9m in attributable net profit (+357%), due to higher contribution from the Data Centre (DC) division, despite a dip in revenue to S$46.5m (-8.7%).
- Excluding one-off items totaling a net of S$55.8m, core net profit came in at S$16.3m, down 3% yoy.
- Segment-wise on a quarterly basis, DC net profit was up 15% yoy, better than our expectation. The logistics segment and more notably, investments, performed poorly with net profit falling 7% and 29% yoy.
- The sharp decline in earnings in the investment division was attributable to M1’s 3Q16 earnings decline of 23.4% yoy.
Numerous exceptionals for 3Q16.
- The DC segment continued to be the core growth driver with revenue of this division having grown 21.3% in 3Q16 due largely to higher co- location service income from Keppel DC Singapore (KDC SG) 3 and Keppel Almere. The DC division delivered exceptional gains of S$82.8m, including gains on the disposal of Keppel DC REIT Management and adjusted gains from the two previous DC disposals.
- Excluding exceptionals, operating profit for DC would have hit S$8.4m (+11% yoy). The logistics division saw exceptional losses, recording an impairment loss of S$27.0m. Excluding that, logistics would have delivered S$2.7m in operating profit, down 9% yoy mainly due to lower contribution from China operations.
STOCK IMPACT
DC continues to drive the next leg of growth for Keppel T&T.
- Going forward, we note the conditional sale agreement for KDC SG 3 and adjust our revenue forecasts downwards. Other than generating further exceptional gains for shareholders, this will help Keppel T&T recycle its capital and accelerate DC development.
- KDC SG 4 is targeted for TOP in early- 17 and we believe that KDC SG 5 (or equivalent) will begin development next year as well.
- We are confident that the DC division will drive the next leg of growth for Keppel T&T.
Demand shifting towards cloud services.
- Management noted that in the past, the breakdown of its clientele was evenly divided into three parties: government, financial institutions and cloud services.
- Of late, KPTT has seen strong demand largely from cloud service players, and much of this demand has tilted towards cloud services. This is being driven by a growing adoption of cloud-based services such as Microsoft’s Office 365 (MSFT US/NOT RATED), Amazon Web Services (AMZN US/NOT RATED), Google Alphabet (GOOGL US/NOT RATED), Salesforce.com, etc, whose extensive data requirements is driving up demand for DC space.
Cloud service players have higher requirements for DCs.
- There are primarily two factors that determine whether a DC can support a cloud service player: a) track record; and b) power density.
- Given the mission-critical services that cloud service players provide, they will only work with trusted service providers.
- Additionally, cloud service players’ server racks demand high power psf, owing to the large number of servers they have within the same space. This can be 2-8 times higher than power needed for standard server racks. Not all existing DC capacity is designed to handle this.
Supply shortage of cloud service-supportable DCs.
- A significant number of existing DC capacity neither has neither the track record nor the power infrastructure to support the higher requirements of cloud service players. From this perspective, the current supply of cloud service-supportable DCs is insufficient as demand growth rapidly shifts towards cloud services.
Keppel T&T the answer to the supply shortage.
- Cloud service-supportable DCs remain in short supply, and KPTT is the answer to this scarcity. With the recent disposal of KDC SG 3 and the Alpha Data Centre Fund (ADCF), KPTT will be able to tremendously accelerate their DC development rate.
- As the fund will consider both greenfield and brownfield options, we believe this could speed up development by as much as 2-3 DCs a year from one presently.
Increasing coverage on Asian DCs with closest peer, Hong Kong SUNeVision, currently trading at 28x PE.
- As expected, investors are beginning to pay more attention to the Asian DC sector. Stock coverage for Hong Kong-listed SUNeVision (8008 HK, NOT RATED), the closest peer to Keppel T&T's DC business, was recently initiated at an implied valuation of 35x 2017F P/E. SUNeVision comes in as a close comparison to Keppel T&T's DC business, as they are both sizable players in the Asian DC market. Despite Singapore having a better DC market than Hong Kong, SUNeVision is currently trading at 28x forward P/E.
EARNINGS REVISION/RISKS
Lowering earnings estimate for by 2-5% for 2016-18.
- Our downwards earnings revision is largely due to M1, for which our in-house estimates have been revised down by 6-31% over 2016-18.
- While KPTT started operating its Tianjin facility as scheduled in Sept 16, we do not expect it to be profitable until mid-17. However, our downward assumption changes are partially offset by an upward revision to our DC earnings estimate.
VALUATION/RECOMMENDATION
Maintain BUY with a higher target price of S$2.36.
- We remain bullish on the DC business, which will form a large part of KPTT’s valuation going forward.
- With M1’s poor 3Q16 performance, we have incorporated our in-house revised target price of S$1.76 for the company. However, this is offset by higher contribution and margin expansion from KPTT’s DC business.
- Our use of 30x PE is justified, given that it represents a 50% discount to US DCs’ PE mean of 60x, which is also comparable to its nearest peer SUNeVision that is trading at 28x.
- With the surge in demand for DCs by cloud service players, KPTT is poised to reap the benefits.
Edison Chen
UOB Kay Hian
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Foo Zhi Wei
UOB Kay Hian
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http://research.uobkayhian.com/
2016-10-20
UOB Kay Hian
SGX Stock
Analyst Report
2.36
Up
2.280
