Keppel T&T - CIMB Research 2017-04-19: Expect A Stronger 2H

Keppel T&T - CIMB Research 2017-04-19: Expect a stronger 2H KEPPEL TELE & TRAN K11.SI

Keppel T&T - Expect a stronger 2H

  • Keppel T&T (KPTT)’s 1Q17 net profit was broadly in line at 20% of our FY17 forecast. Net profit fell 13% yoy in 1Q17 due to previous sales of stakes in profit generating assets.
  • The shortfall in group operating profit (1Q17: -S$1.7m vs. 1Q16: +S$6.7m) was partly offset by higher associates contributions (1Q17: S$19.5m vs. 1Q16: S$16m).
  • 2H17 should benefit from 
    1. fresh contribution from KDC SGP4, 
    2. higher profit at its Tianjin logistics project and 
    3. the start of operations at its Lu’an logistics project.
  • KPTT is undertaking a strategic review of its 19% M1 stake. A possible divestment would unlock significant capital and fund its core business growth.
  • Maintain Hold call, with a slightly higher FY17F SOP-based target price of S$1.73.

1Q17 results broadly in line 

  • Group net profit fell 13% yoy to S$11.6m in 1Q17 (1Q16: S$13.3m). 
  • The decline was not unexpected given KPTT’s previous disposals of 
    1. its 90% stake in KDC SGP 3 (sales completed in Jan 17) and 
    2. 50% stake in Keppel DC REIT Management (KDCRM, in Jul 16); 
    the two entities have since become KPTT’s associates and de-consolidated from group reporting. As a result, operating profit fell to -S$1.7m in 1Q17 (1Q16: +S$6.7m); the impact was mitigated by higher associates contribution of S$19.5m (1Q16: S$16m).

Data Centre (DC): awaiting KDC SGP4 contribution from 2Q17 

  • Group DC revenue halved to S$5.9m in 1Q17 and operating profit fell to -S$0.1m (1Q16: +S$6.8m) due to the above-mentioned sales. 
  • We note that a significant portion of the DC revenue in 1Q17 was facility management fees from its DCs previously sold to KDC REIT, and the rental contribution from Almere 2 (c.40% occupied) remained slow. 
  • We expect DC rental income to pick up from 2Q17 onwards, with fresh contribution from KDC SGP 4 (c.25% committed, due for completion in Apr 17).

Logistics: yoy lower profit due to start-up cost, but qoq improving 

  • The yoy lower logistics operating profit (1Q17: S$1.4m vs. 1Q16: S$2.6m) was likely due to: 
    1. the start-up cost for its Tianjin Eco-City logistics project (operation started in Sep 16) and 
    2. the loss-making position of Courex (acquired in Oct 16). 
  • Although yoy lower, we note that the S$1.4m operating profit was an improvement over S$0.6m in 4Q16, as KPTT made positive progress in ramping up its Tianjin operations and integrating Courex. 2H17 should see the contribution from the group’s Lu’an logistics project.

Strategic review of M1 stake 

  • According to a Bloomberg news article on 17 Mar, KPTT and other key shareholders are undertaking a strategic review of their respective shareholdings of M1 (KPTT owns 19%). The move makes sense to us as the M1 stake is deemed a non-core investment for KPTT. 
  • A possible divestment of the M1 stake would enable KPTT to recoup S$380m capital (based on M1’s current price of S$2.12) and deploy the proceeds to its higher return core businesses (i.e. data centre and logistics).

Maintain Hold 

  • We maintain our Hold call on KPTT, with our FY17F SOP-based target price raised slightly to S$1.73 (previously S$1.70) to reflect M1’s recent share price recovery. 
  • The lower net gearing of 0.36x as at end-1Q17 (due to the sale of stakes in KDC SGP3 and KDCRM vs. 0.53x at end-FY16) has provided KPTT more ammunition for future greenfield/brownfield DC development. 
  • Upside risk could come from a faster pace of DC acquisitions; downside risk from a slower-than-expected ramp-up of its DC occupancy.

Roy CHEN CFA CIMB Research | 2017-04-19
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.73 Up 1.700