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
- fresh contribution from KDC SGP4,
- higher profit at its Tianjin logistics project and
- 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.
1Q17 results broadly in line
- 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
- its 90% stake in KDC SGP 3 (sales completed in Jan 17) and
- 50% stake in Keppel DC REIT Management (KDCRM, in Jul 16);
Data Centre (DC): awaiting KDC SGP4 contribution from 2Q17
- 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).
Logistics: yoy lower profit due to start-up cost, but qoq improving
- The yoy lower logistics operating profit (1Q17: S$1.4m vs. 1Q16: S$2.6m) was likely due to:
- the start-up cost for its Tianjin Eco-City logistics project (operation started in Sep 16) and
- 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.
Strategic review of M1 stake
- 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.