Keppel T&T - CIMB Research 2017-04-19: Expect A Stronger 2H

KEPPEL TELE & TRAN K11.SI

Keppel T&T - Expect a stronger 2H

Keppel T&T (KPTT)’s 1Q17 net profit was broadly in line at 20% of our FY17 forecast. Net profit fell 13% yoy in 1Q17 due to previous sales of stakes in profit generating assets.
The shortfall in group operating profit (1Q17: -S$1.7m vs. 1Q16: +S$6.7m) was partly offset by higher associates contributions (1Q17: S$19.5m vs. 1Q16: S$16m).

2H17 should benefit from
1. fresh contribution from KDC SGP4,
2. higher profit at its Tianjin logistics project and
3. the start of operations at its Lu’an logistics project.
KPTT is undertaking a strategic review of its 19% M1 stake. A possible divestment would unlock significant capital and fund its core business growth.
Maintain Hold call, with a slightly higher FY17F SOP-based target price of S$1.73.

Group net profit fell 13% yoy to S$11.6m in 1Q17 (1Q16: S$13.3m).
The decline was not unexpected given KPTT’s previous disposals of
1. its 90% stake in KDC SGP 3 (sales completed in Jan 17) and
2. 50% stake in Keppel DC REIT Management (KDCRM, in Jul 16);
the two entities have since become KPTT’s associates and de-consolidated from group reporting. As a result, operating profit fell to -S$1.7m in 1Q17 (1Q16: +S$6.7m); the impact was mitigated by higher associates contribution of S$19.5m (1Q16: S$16m).

Group DC revenue halved to S$5.9m in 1Q17 and operating profit fell to -S$0.1m (1Q16: +S$6.8m) due to the above-mentioned sales.
We note that a significant portion of the DC revenue in 1Q17 was facility management fees from its DCs previously sold to KDC REIT, and the rental contribution from Almere 2 (c.40% occupied) remained slow.
We expect DC rental income to pick up from 2Q17 onwards, with fresh contribution from KDC SGP 4 (c.25% committed, due for completion in Apr 17).

The yoy lower logistics operating profit (1Q17: S$1.4m vs. 1Q16: S$2.6m) was likely due to:
1. the start-up cost for its Tianjin Eco-City logistics project (operation started in Sep 16) and
2. the loss-making position of Courex (acquired in Oct 16).
Although yoy lower, we note that the S$1.4m operating profit was an improvement over S$0.6m in 4Q16, as KPTT made positive progress in ramping up its Tianjin operations and integrating Courex. 2H17 should see the contribution from the group’s Lu’an logistics project.

According to a Bloomberg news article on 17 Mar, KPTT and other key shareholders are undertaking a strategic review of their respective shareholdings of M1 (KPTT owns 19%). The move makes sense to us as the M1 stake is deemed a non-core investment for KPTT.
A possible divestment of the M1 stake would enable KPTT to recoup S$380m capital (based on M1’s current price of S$2.12) and deploy the proceeds to its higher return core businesses (i.e. data centre and logistics).

We maintain our Hold call on KPTT, with our FY17F SOP-based target price raised slightly to S$1.73 (previously S$1.70) to reflect M1’s recent share price recovery.
The lower net gearing of 0.36x as at end-1Q17 (due to the sale of stakes in KDC SGP3 and KDCRM vs. 0.53x at end-FY16) has provided KPTT more ammunition for future greenfield/brownfield DC development.
Upside risk could come from a faster pace of DC acquisitions; downside risk from a slower-than-expected ramp-up of its DC occupancy.

Roy CHEN CFA CIMB Research | http://research.itradecimb.com/ 2017-04-19

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.73 Up 1.700