Keppel Telecommunications & Transportation (KPTT SP) - UOB Kay Hian 2017-07-20: 2Q17 Buffeted By Unexpected Headwinds In Logistics

Keppel Telecommunications & Transportation (KPTT SP) - UOB Kay Hian 2017-07-20: 2Q17 Buffeted By Unexpected Headwinds In Logistics KEPPEL TELE & TRAN K11.SI

Keppel Telecommunications & Transportation (KPTT SP) - 2Q17 Buffeted By Unexpected Headwinds In Logistics

  • KPTT reported a 2Q17 net profit of S$10.3m, below expectations. 
  • The weakness stemmed largely from continued weakness in the logistics business, as well as absence of data-centre revenue from assets divested (T27). 
  • The outlook for a turnaround in the logistics business has now been pushed from 2018 to 2019. 
  • The data-centre business remains robust, and will benefit from development fees and continued earnings from T20. 
  • Pending a review of the outlook with management, we are placing the stock UNDER REVIEW.


2Q17 RESULTS


2Q17 net profit of S$10.3m, below expectations.

  • Keppel Telecommunication and Transportation (KPTT) reported headline net profit of S$10.3m (-45.3% yoy, -11.1% qoq).
  • The decline was largely due to an absence of earnings from T27 and continued weakness in logistics earnings, which saw operating margins decline to 1.7%. The revenue decline in the datacentre (DC) business was anticipated, but that from logistics was not.

DC revenue boosted by development fees. 

  • Revenue was S$12.9m (-5.4% yoy, +118% qoq) due to the absence of revenue from T27 and Keppel DC Reit Management. The qoq improvement was due to development fees KPTT received for a Singapore DC asset.
  • Operating profit was S$4.5m, a reversal from a loss in 1Q17. The margin on the fee is understood to be substantial and was the reason for the quarterly jump in operating margin from -2.5% in 1Q17 to 35.1% in 2Q17. Additional development fees are expected to be recognised in coming quarters.

Stormy outlook for logistics. 

  • Revenue came in at S$34.7m (-5.0% yoy, 0% qoq) as additional revenue from assets ramping up in China was offset by weakness in a SE Asian operation. 
  • A stormy outlook lies ahead for KPTT’s logistics division as volumes and margins remain under pressure, with the market outlook challenging. KPTT’s focus on Vietnam and Indonesia has proven fruitful as the two regions saw better results. 
  • China’s Tianjin project remains in ramp-up mode, with rising occupancy, but breakeven remains distant. The Jilin and Lu’an projects have been delayed, with the latter project’s start-up being delayed to 1H18.


STOCK IMPACT


A silver lining for logistics. 

  • Courex (acquired in Oct 16) represents a bright spot and part of KPTT’s transformational strategy for the logistics business in Singapore. It intends to tap on Courex’s last-mile fulfilment to capture additional parts of the logistics value chain and grow its urban logistics business. 
  • Additionally, the recent launch of its omnichannel management solution (providing a seamless shopping experience) targeting FMCG companies will help. Already, a large FMCG firm has signed up and KPTT is targeting more. 
  • Nonetheless, we admit overconfidence in prospects for the logistics division and anticipate breakeven only in 2019.

DC demand remains healthy; KDC SG4 comes online. 

  • For the DC division, KDC SG4 (T20) has obtained full TOP and commenced operations. Revenue recognition is expected in 3Q17, with the delay attributed to additional sign-offs. 
  • The pipeline of enquires indicates healthy DC demand and KPTT is collaborating with Singapore’s government agencies to explore innovations in green DC solutions. 
  • Project pipeline remains robust, and we expect positive developments in the future. That said, earnings contributions from new projects will be subject to a 3-6 month delay due to initial planning and construction.

KDC SG4 to still provide recurring earnings despite divestment. 

  • On 18 Jul 17, KPTT announced that it would be injecting KDC SG4 into the Alpha Datacentre Fund (ADCF).
  • KPTT will still retain a 40.7% stake in the asset, and will continue to recognise earnings from it, albeit via associate earnings. 
  • The resultant drop in earnings from the lower stake will likely be offset by continued development fees KPTT will earn from ADCF. The move also frees up KPTT’s balance sheet to pursue new projects, bringing forward our expectations of earnings from future DC assets.


EARNINGS REVISION / RISKS


Earnings under review. 

  • We have left our earnings forecast for KPTT unchanged for now, pending a review of the logistics and DC business with management.


VALUATION/RECOMMENDATION


Recommendation placed UNDER REVIEW. 

  • Given the various shifts in the business outlook and strategy, we have placed our recommendation under review. As the review will impact our earnings outlook for the business units, our SOTP-based target price is also placed under review. 
  • We see no near-term catalysts in sight, and expect share price to trend sideways in the near-mid term. 
  • The outcome of our review is expected to be completed before end-August.




Edison Chen UOB Kay Hian | Foo Zhi Wei UOB Kay Hian | http://research.uobkayhian.com/ 2017-07-20
UOB Kay Hian SGX Stock Analyst Report UNDER REVIEW Maintain BUY 2.510 Same 2.510



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