Keppel T&T - Bad quarter, but earnings should recover from here
- FY16 core net profit of S$48.5m was a big miss at 75%/77% of our/consensus forecasts due to start-up costs across both logistics and data centre (DC) segments.
- We expect 1Q17 operating profit to remain weak before revenue streams in from Keppel DC Singapore 4 and Lu’an, but net profit could be lifted by associates.
- We cut FY17-18F EPS by 13-24% for lower profits across the logistics and data centre segments. We also lower M1 contributions and introduce FY19 estimates.
- Maintain Hold, with a lower SOP-based TP of S$1.70. While 4Q16 was a bad quarter, we think the worst is likely to be over and earnings should recover in 1Q17.
All that could have possibly gone wrong happened in 4Q
- 4Q16 core net profit of S$2.3m (-84% qoq, -92% yoy) was a far cry from our expectation of S$19m. Multiple factors were to blame:
- loss of 1 month’s rental income as Keppel DC SG 3 was divested to KDCREIT,
- startup costs at its distribution centre in Tianjin,
- marketing and promotion costs ahead of the opening of its logistics facility at Lu’an in mid-2017,
- a one-off S$1m-2m startup cost at Alpha DC Fund,
- new headcount in the DC division and
- share of fair value loss on investment properties at KDCREIT.
Data centre segment saw losses but should turn around in 1Q17
- We estimate that the DC segment recorded net loss of S$0.8m in 4Q16.
- Lower rental income from SG 3 and higher expenses as it ramped up hiring led to lower operating profit of S$4.7m (-44% qoq, -35% yoy), or S$0.7m excl. revaluation gains. We expect DC operating profit to be challenged in 1Q17 after the sale of SG 3, but should be offset by higher contributions from KDCREIT in the absence of fair value losses seen in 4Q16.
- SG 4 will achieve its first phase of TOP in end Mar and should start contributing in 2Q17.
Logistics – not optimistic on China, but turning focus to ASEAN
- Logistics operating profit was uninspiring at S$0.6m (-78% qoq, -85% yoy) as costs escalated.
- Management guided for market conditions in China to remain challenging in 2017. Its efforts to diversify into ecommerce logistics in ASEAN appear to bring more opportunities, but could take time to bear fruits and is itself a competitive market.
- Its acquisition of Courex is tracking well, though contributions are still negligible. Its facility in Lu’an is due for completion in Jun, which should boost operating profit in 2H17.
Higher DPS of 4.5 Scts declared
- In FY16, KPTT completed the sale of 50% interest in Keppel DC REIT Management for a gain of S$55.8m.
- It will also recognise net proceeds of S$121.1m in 1Q17 from selling a 90% stake in Keppel DC Singapore 3 to KDCREIT. In light of this, it has declared a final DPS of 4.5 Scts (higher than its usual 3.5 Scts), bringing its dividend yield to 2.5%.
- We cut FY17-18F EPS by 13-24% for lower logistics and data centre profits. We also lower M1 contributions, and our SOP-based target price falls to S$1.70.
- While 4Q16 was a bad quarter, we expect earnings to improve from here. Our SOP valuation is also supported by the market value of its stakes in KDCREIT and M1 (65% of our valuation).
- Upside risk could come from a faster pace of DC acquisitions; downside risk from its inability to increase occupancy at its DC assets to enable capital recycling via KDCREIT.