Keppel T&T - CIMB Research 2016-10-19: Earnings slippages all-round

Keppel T&T - CIMB Research 2016-10-19: Earnings slippages all-round KEPPEL TELE & TRAN K11.SI

Keppel T&T - Earnings slippages all-round

  • Excluding one-off gains and impairment losses, 3Q16 core net profit came in at S$14.1m, below expectations. 9M formed 65% of our full-year forecast.
  • The weak performance was broad-based as the data centre (DC) segment lost 50% of REIT management fees, logistics saw lower occupancy and M1 contributions fell.
  • KPTT’s sale of a 90% stake in SGP 3 to KDCREIT is expected to be completed by Dec 2016, raising net proceeds of S$121.1m and recording a gain of S$1.065m.
  • We downgrade from Add to Hold as the positives appear to be priced in after a good run. Our SOP target price falls to S$1.77 after 2-8% EPS cuts in FY16-18F.

Quarter of one-offs; beware the slippages in core net profit 

  • KPTT recognised many one-offs during the quarter: 1) S$55.8m gain on disposal of a 50% stake in Keppel DC REIT Management and fair value gain of remaining 50% stake, 2) S$27.0m adjustment to prior gain on disposal of SGP 1 and SGP 2 data centres due to lower property taxes, and 3) S$27.0m impairment loss on logistics assets in China.
  • Stripping out these items, 3Q core net profit came in at S$14.1m (-8% qoq, -25% yoy) as weak all-round performance was exacerbated by loss of 50% in REIT management fees.

Selling 90% stake in SGP 3 to KDCREIT for S$1.065m gain 

  • KPTT plans to sell a 90% stake in SGP 3 for S$202.5m in Dec, which values the DC at S$225m (10.5% NPI yield, 8% cap rate). 
  • Netting off S$161.7m in liabilities, S$18m equity injection, S$1.58m income support, S$0.1m in fees, and adding back a S$100m shareholder loan, net proceeds would amount to S$121.1m and will be used for investments and working capital. 
  • A gain of S$1.065m will be recognised in 4Q. KPTT’s pro forma calculations show an expected S$2.5m fall in net profit after the sale.

Lower DC earnings in interim, but speeding up pace of acquisitions 

  • Data centre revenue fell 12% qoq and core profit after tax fell 11% qoq on lower REIT management fees as KPTT sold a 50% stake in Keppel DC REIT management. We also adjust for lower DC earnings in 4Q to factor in the sale of SGP 3 to KDCREIT in Dec.
  • Management guided that occupancy at Almere 2 remains at 40%, while SGP 4 is on track for completion in early-2017. With the Alpha data centre fund, KPTT is targeting to develop or acquire at least two assets per year, up from one per year previously.

Logistics – China not up to par; going into ecommerce fulfillment 

  • Logistics revenue fell 6% qoq and core profit after tax fell 46% qoq on poorer showing in China and Singapore. 
  • Management said its Tianjin Eco-city project began operations in Sep with c.15% occupancy, and expects it to turn profitable in mid-FY17. 
  • KPTT is also acquiring a 59.6% stake in Courex, an integrated ecommerce fulfillment provider in Singapore. It expects to drive synergies by extending last-mile delivery services for its B2B clients. We think Courex could be making small losses at this stage.

Downgrade from Add to Hold 

  • We downgrade KPTT to Hold from Add following its recent share price run. At 13x CY17 P/E, we think the positives are largely priced in. 
  • If no special DPS is declared upon divestment of SGP 3 in 4Q, it could be negative news to the market. 
  • Our SOP-based target price falls to S$1.77 as we cut FY16-18F EPS forecasts by 2-8% and roll forward to FY17. 
  • Upside/downside risks could come from faster/slower pace of DC asset recycling

Jessalynn CHEN CIMB Research | 2016-10-19
CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 1.77 Down 1.830