Keppel Telecommunications & Transportation (KPTT SP) - Look Forward To 2H17
- KPTT reported a 1Q17 net profit of S$11.6m (-13% yoy), in line with our expectation of a weak 1H17.
- The earnings decline was largely attributed to the absence of revenue from businesses divested in 2016, but this was partly offset by a higher contribution from associate earnings.
- Demand for its data centres remains robust, and we expect a turnaround starting from 2Q17 onwards as its T20 data centre comes on stream.
- Our SOTP target price of S$2.51 remains unchanged. Maintain BUY.
1Q17 results within expectations.
- Keppel T&T’s (KPTT) 1Q17 reported net profit of S$11.6m (-13% yoy) represents 19% of our full-year estimate. Results are in line with our expectations of weak 1H17 earnings.
- Earnings will be more pronounced towards 2H17 as the KDC SG4 (T20) comes online. The weaker earnings this quarter was primarily due to lower profit contribution from KDC SG3 (T27), which has been divested and now accounted for as an associate stake. This was unlike the case in the prior period where it was wholly accounted for.
Logistics operating profit down 46% yoy.
- Operating profit for the unit came in at S$1.4m (-46% yoy) and operating margin was lower at 4.0% (1Q16: 7.4%). Lower revenue in Singapore due to intense competition was offset by higher turnover in China and Vietnam. Furthermore, the start-up costs for ramping up the logistic centre in Lu’an weighed down bottom line as it is still loss-making.
- Management is confident that they will turn profitable and business activity for the whole segment will pick-up in 2H17.
Data centre segment reports a temporary operating loss.
- This was due to the absence of revenue from the divestment of T27 and transformational costs as previously highlighted in the 4Q16 results announcement. Revenue was broken down into S$5.1m from data centre facility management services and S$0.8m from Almere DC 2.
- The operating loss was due to higher staff and SG&A costs as part of its ramp up that started in 4Q16 to capture new opportunities in the data centre market.
- KDC SG4 (T20) remains on track to come online in 2Q17.
Share of associate earnings up 21.5% yoy.
- The higher associate earnings were due to contributions from associates Keppel DC Reit Management (KDCRM) and the T27 data centre as these two businesses had previously been wholly accounted for under KPTT in 1Q16.
Look towards better 2H17 earnings.
- We expect 1H17 to be weak as KPTT undergoes a transition to enter its next phase of growth. Demand for its data centres remains strong and we expect this to manifest in high occupancy rates for T20 and the new PCCW Global – Keppel ICX (HK) data centre.
- Earnings for the former is expected to kick in during 2Q17 with an immediate 25% take-up rate, while the latter will likely contribute from 4Q17 onwards.
Benefits from increasingly heated logistics-based M&A arena.
- With the recent GLP and CWT (19x 2016 PE and 1.6x 2016 PB) M&A announcements, the logistics sector is looking increasingly “hot”.
- With its logistics arm, KPTT is already a beneficiary of this shifting trend with the HK$250m sale of its 10% stake in the Asia Airfreight associate, representing a disposal gain of approximately S$19.0m (which should come in by late 2H17).
Conservative PE valuation of S$51.0m despite S$291.3m NAV for logistics segment.
- As the M&A trend continues, KPTT is well positioned to dispose of more noncore assets and recycle capital to focus on its core businesses.
- Given S$291.8m NAV for its logistic segment, we note the potential upside even if the entire logistics segment is valued at 1.0x P/B. However, we opt to maintain our conservative stance with our 10x forward PE valuation.
No change to 2017-18 earnings forecasts.
- Our earnings forecasts for 2017-18 remain unchanged at S$62m and S$75m respectively, while our 2019 earnings forecast has been tweaked down to S$81m.
Maintain BUY, with an unchanged target price of S$2.51.
- We keep our target price of S$2.51 unchanged despite the minor increase in SOTP value to S$2.53 after incorporating changes for its Singapore-listed investments.
- As the preferred vendor for cloud-enabled data centres in the region, we expect earnings to rebound in 2H17 driven by strong demand for its data centres.
- Given the earnings potential of its data centres, it should trade at ~30x forward PE like peer SUNeVision (8008 HK, 29x forward PE) instead of current implied 13-14x forward PE.
- Further upside not accounted for in our SOTP could come from M&As from its logistics business.
- Maintain BUY.