Keppel T&T - CIMB Research 2016-07-20: Sleeping beauty has awoken

Keppel T&T - CIMB Research 2016-07-20: Sleeping beauty has awoken KEPPEL TELE & TRAN KEPPEL T&T K11.SI 

Keppel T&T - Sleeping beauty has awoken

  • 2Q16 net profit of S$19m broadly in line; 1H formed 46% of our FY16 forecast.
  • Keppel Corp announced a US$500m Alpha Data Centre Fund, hot on the heels of KPTT’s sale of 50% stake in KDCRM to Keppel Capital.
  • We tweak our FY16-18 EPS as we lower KDCRM management fees and taper M1 contributions, offset by higher core DC earnings and contributions from KDCREIT.
  • Maintain Add, with a higher SOP target price of S$1.83 as we adjust for the higher market values of its 19% stake in M1 and 30% stake in KDCREIT.

Earnings lifted by all-round improvements

  • KPPT posted 2Q16 net profit of S$18.8m, up a marked 41% qoq. 
  • While revenue rose a muted 4% qoq, operating profit grew 24% qoq as logistics saw margin expansion from customers in high value industry verticals and the data centre segment saw higher occupancy at T27
  • Associates (+22% qoq) also helped lift the bottomline, as logistics associates returned to the black and contributions from KDCREIT improved.

Logistics to see more meaningful growth starting 2H16

  • While logistics earnings have been hit since FY15 by a slowdown in ASEAN and startup costs for new projects, we think it is poised to improve starting 2H16. The Tianjin and Lu’an projects will be operational in 3Q16 and 1Q17, respectively. 
  • KPTT is also seeing growth in Vietnam and Indonesia, and gaining traction with pharmaceutical clients in Singapore from which it commands higher margin for value added services provided.

New DC contracts; T27 ripe for divestment

  • KPTT has just signed on S$144m in data centre (DC) contracts at T27 and T20. Fit-out for the committed space at T27 will be completed by 4Q16, which will boost occupancy to 100% and make the asset ripe for injection into KDCREIT. T20 is now 25% committed, with phase 1 construction/fit-out to be completed by early 2017.

Sale of 50% stake in KDCRM to Keppel Capital

  • On 1 July, KPTT sold a 50% stake in KDCRM, the manager of KDCREIT, to Keppel Capital for S$38m. KPTT will recognise the remaining 50% in KDCRM as an associate. 
  • We estimate this will result in loss of S$4.4m in management fees p.a., offset by one-off S$56m gain. 
  • KPTT has historically paid out 30-40% of its divestment gains in special dividends (c.3-4 Scts DPS), but management is still weighing it vs. business needs.

Expect faster pace of acquisitions with Alpha DC fund

  • The focus this quarter was the announcement of a US$500m DC fund to be managed by Alpha, a subsidiary of Keppel Capital. 
  • Keppel Data Centres Holding, a 70-30 JV between KPTT and Keppel Land, intends to hold 20% of the fund. We view this positively as it would speed up the pace of acquisitions, which is currently limited to one asset per year given that KPTT’s balance sheet (net debt of S$350m) lacks strength. The fund has a 3-year investment period and targets assets in Asia and Europe.

Maintain Add

  • KPTT remains undervalued, trading close to parity with the market value of its stakes in M1 and KDCREIT, which means zero value is being ascribed to its DCs and logistics assets. 
  • Having the backing of new investors will allow it to recognise upside from DC development profits at an accelerated pace. 
  • Maintain Add, with a higher SOP target price of S$1.83. 
  • The key risk to our call is execution risk in its China logistics projects.

Jessalynn CHEN CIMB Securities | 2016-07-20
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 1.83 Up 1.72