Keppel T&T - CIMB Research 2015-12-09: New capacity to drive earnings in 2016

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KEPPEL TELE & TRAN KEPPEL T&T K11.SI 

Keppel T&T - New capacity to drive earnings in 2016 

• KPTT is on track to divest T27 to Keppel DC REIT in early 2016, which will allow it to recycle capital and speed up its investments in DC assets. 
• It has ambitious plans to double its data centre AUM in 4-5 years on a combined platform with the REIT. 
• Ramp-up in occupancy and opening of new logistics facilities will relieve pressure from startup costs and drive better earnings growth in 2016. 
• We maintain our Add rating with a SOP-based target price of S$1.91. 

■ Logistics to see improvement in 2016 with new facilities 

• Logistics disappointed in 2015, due to: 
  1. startup costs for its new facilities, 
  2. lower associates contributions, 
  3. slowdown in bulk cargo in China, and 
  4. increased competition in ASEAN. 
• We expect 2016 to be better, driven by: 
  1. ramp-up in occupancy at Tampines Logistics Hub as tenants move in, 
  2. the opening of Tianjin Eco-city distribution centre in end-2015 and Lu’An logistics park in early 2016, and 
  3. execution of e-commerce logistics contracts in Singapore and Indonesia. 

■ Data centre to remain the key driver; targets doubling of AUM 

• Data centre contributed 42% of net profit in 9M15, and we expect this figure to rise with: 
  1. the opening of Almere 2 in 4Q15, 
  2. phase 1 completion of Keppel Datahub 3 in end- 2016, 
  3. growth in management fees from Keppel DC REIT, and 
  4. higher associates contributions from the REIT as its portfolio grows. 
• KPTT has an ambitious target of doubling its data centre AUM in 4-5 years on a combined platform with the REIT. 

■ Asset recycling to spur more data centre investments 

• KPTT is on track to divest T27 to Keppel DC REIT in early 2016. 
• We estimate that the carrying value of T27 on KPTT’s balance sheet is S$127m-137m (recognised at cost and subsequently remeasured at fair value). This compares with an appraised value of S$224m in Dec 2014, which translates into a potential disposal gain of S$61m-68m for KPTT’s 70% stake. 
• We expect most of the funds to be kept for reinvestments into new data centre projects, to meet KPTT’s target of injecting one asset per year into the REIT. 

■ Beneficiary of digital growth 

• Together with Keppel DC REIT, KPTT is the third largest carrier-neutral data centre player in Singapore. 
• KPTT continues to see strong demand for data centre space, with growth to come from the rise of big data, the shift to cloud computing, Singapore’s Smart Nation vision and as more companies outsource their data storage requirements. 
• Singapore is also seen as a data and connectivity hub for Southeast Asia, and currently accounts for 60% of the region’s data centre capacity, according to Broadgroup. 

■ Maintain Add, with better earnings growth in 2016 

• KPTT trades at 10x forward P/E for 18% earnings growth, which we think is attractive. 
• We also expect asset recycling to spur more aggressive investments in the data centre space, which remains its key growth engine. 
• KPTT continues to trade at a discount to the market value of its stakes in M1 and Keppel DC REIT, which means no value is ascribed to its core data centre and logistics businesses. 
• We maintain our Add call, with a SOP-based target price of S$1.91.

Jessalynn CHEN CIMB Securities | http://research.itradecimb.com/ 2015-12-09

CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 1.91 Same 1.91