Keppel Telecommunications & Transportation (KPTT SP) - 4Q16 Earnings Marred By One-offs; Data Centre Demand Remains Robust
- Keppel Telecommunications & Transportation (KPTT)’s lacklustre 4Q16 results were due to several one-offs, the divestment of DC assets and increase in sales expenses in the bid to shorten the DC development cycle. This transitional period, to capture growth opportunities, should blow over by 2Q17.
- While logistics remains challenging, we remain optimistic towards its DC business.
- To be conservative, we lower our 2017-18 earnings forecasts by 20-22% due to the non-inclusion of new acquisition profits and logistics drag.
- Maintain BUY and lower target price to S$2.51.
4Q16 results below expectation due to drag from associates and logistics.
- Keppel T&T’s (KPTT) 4Q16 results came in below our expectation on a weaker-than-expected performance from its logistics business and lower associate earnings (Keppel DC Reit).
- Numerous one-off items were also recorded in 4Q16 for the Data Centre (DC) segment, including acquisition costs for the Frankfurt data centre, fair value losses on investment properties from associate Keppel DC Reit and a fair value gain on investment properties for KPTT (T27 & Almere 2).
- Excluding the one-off items, core earnings for 2016 came in at S$48.5m.
DC segment's blip performance largely due to earlier divestment of DC asset and transformational costs.
- Due to the absence of earnings contribution from T27 (divested to Keppel DC REIT in 4Q16), one-off acquisition costs from the Frankfurt DC as well as a S$3m increase in staff costs, operating profit fell sharply qoq to S$0.7m in 4Q16 from S$8.4m in 3Q16.
- Management explained that this was a transition quarter for the company, with them focusing on developing new assets and capturing new opportunities which require ramp-ups in manpower and SG&A.
- Performance is likely to pick up strongly from 2Q17 onwards as the occupancy rate for Almere 2 DC and Frankfurt DC are likely to improve in line with explosive demand, with further support to performance expected to come from the commencement of Keppel DC SG4 (T20).
Logistics business continues to be a drag.
- 4Q16 operating profit from the logistics segment came in at S$0.6m (-77% yoy) on the back of a weak occupancy rate and high start-up costs arising from its new China projects. Start-up costs were high for its Tianjin project for which occupancy rate has yet to pick up.
- Meanwhile its Lu’an project is expected to only kick-off operations in 1Q17.
- Going forward, the outlook for KPTT’s China logistics business remains challenging but management is optimistic about its Southeast Asia business.
- Nonetheless, we were previously too early with calling out a bottoming in performance and the recovery of its logistics segment may only take place further down the road.
Optimistic about DC business.
- We shared management’s optimism towards its DC business. While 4Q16 was lacklustre, we opine that the transition phase was necessary for the group to seize the tremendous opportunities ahead.
- Management is optimistic that with the additional headcount, occupancy at the existing DCs will be filled rapidly and they will hence be able to accelerate the development cycle. Both Almere 2 and Frankfurt DC are seeing strong demand from existing anchor tenants as well as new tenants with occupancy on track to be filled.
- Meanwhile, management is also seeing strong demand for its upcoming Singapore DC4, particularly from the cloud service providers. Therefore, we are confident that KPTT's performance will pick up.
Lower 2017-18 earnings forecasts by 20-22%.
- To be conservative, we have not taken into account any new acquisitions revenue or profit. Our lower core earnings forecasts of S$62m (-20%) and S$75m (-22%) for 2017 and 2018 respectively arises from a weaker outlook for the logistics business, as well as our conservative assumptions on provisions for acquisitions.
- We highlight that KPTT’s earnings are expected to be lumpy in the near term owing to the cyclicity of its business model, which is currently the most optimal for developing assets without stretching balance sheet.
- We introduce our 2019 earnings forecast of S$84m.
Maintain BUY with target price of S$2.51.
- Our SOTP target price has been reduced slightly to S$2.51, as we roll over to FY18 and incorporate our recent change to M1’s target price to S$2.48.
- Our target price for KPTT remains largely unchanged due to the sharp revision in M1’s target price to S$2.48 (previously S$1.76) which impacted our SOTP valuation by S$0.23 per share.
- Despite the earnings hiccup, we expect the demand for cloud-enabled data centres to remain intact, and earnings to flow in over time.
- KPTT remains the best candidate to reap its rewards, being the preferred vendor among cloud service players within the region.