Keppel Telecommunications & Transportation (KPTT SP) - UOB Kay Hian 2017-10-19: 3Q17 Logistics Turnaround Could Be On The Horizon

KEPPEL TELE & TRAN K11.SI

Keppel Telecommunications & Transportation (KPTT SP) - 3Q17 Logistics Turnaround Could Be On The Horizon

Keppel T&T (KPTT)’s 3Q17 results came in below expectations.
Due to an absence of contribution from KDC SG3, datacentre profits were down, but management fees and occupancy remain healthy with a pipeline of possible incoming deals. With cost rationalisation and the launch of its Courex omnichannel, we believe a logistics turnaround is on the horizon.

We lower 2017-19 earnings forecasts by 3-6% on datacentre fee margin adjustment.
Maintain BUY with unchanged target price of S$1.90.

Keppel Telecommunication and Transportation (KPTT) reported 3Q17 headline net profit of S$12.8m (-82% yoy) on lower revenue from the datacentre segment. Excluding a one-off gain of S$3.5m from transfer of shares in Keppel Datacentre SG 4 (KDC SG4), 3Q17 core earnings was S$10.3m (-27% yoy).
9M17 core earnings was below expectations, accounting for 68% of our full-year earnings, on lower-than-expected datacentre earnings on a one-off expense charge from fund raising for the ADCF fund.

The key datacentre segment saw lower revenue of S$9.2m (-23% yoy) on the absence of contribution from KDC SG3, which was injected into KDC Reit in Dec 16.
Datacentre facility management fees was S$7.3m for 3Q17, and a development fee of ~S$1m was noted for the period.
Operating profit was lower at S$4.5m (-46% yoy) on absence of earnings contribution from subsidiaries disposed. Core operating margin was comparable at 36% (2Q17: 35%), after reversing:
1. one-off gain from the share transfer of KDC SG4 and,
2. one-off expense charge from fund raising activities.

The Logistics segment remained weak, reporting an operating profit of S$1.3m (-52% yoy, +118% qoq). The improvement was attributed to cost rationalisation efforts. Management remarked that the division was still undergoing transformation, and it would take time for the segment to become truly profitable.
In terms of operational updates, its Tianjin facility has ramped up nicely, but remains slightly below breakeven, while its Lu’an facility is still expected to commence start-up within 1H18.

For its Datacentre arm, we believe the US$350m that Canada Pension Plan Investment Board has allocated (with an option for a further US$150m) for partnership with the Alpha Fund indicates a strong pipeline of deals ahead, which we expect to materialise in the next 1-2 quarters. This will mean higher development fees as well as an increase in recurring management fees and rental income at the associate level.

For existing assets such as KDC SG4 and the Frankfurt datacentre, management is confident on occupancy given strong demand in the Singapore and Frankfurt markets. For Almere 2, business was comparatively slower previously, but should be picking up as management sees a good chance of obtaining a major telco customer.

We believe that the Logistics division is turning around and its Courex omnichannel logistics is on track to perform and will bear fruit given time.
KPTT will be leveraging on its existing logistics facilities and as such, additional costs are mainly on marketing and sales rather than operational. We believe the inflection point for its logistics business is near.

We have lowered our margin assumptions for the facility management services and development fees accordingly. The result lowers our core earnings estimate for 2017-19 to S$44m (-6%), S$53m (-3%) and S$54m (-3%) respectively.

Our target price remains unchanged at S$1.90, despite some small adjustments to our SOTP valuation for M1 (UOBKH target price lowered from S$1.98 to S$1.95) and Keppel DC Reit.
At the very core, KTT’s fundamentals for its DC business remains intact, with earnings growth slightly delayed as the business undergoes a transformation for the better.
Earnings are expected to pick up towards end-17 on development fees from new projects, and positive developments on the ADCF front. Current valuations price the DC business at ~14x 1-year forward PE, which is unwarranted given that peer SUNeVision is trading at 34x 1-year forward PE.
Maintain BUY.

Edison Chen UOB Kay Hian | Foo Zhi Wei UOB Kay Hian | http://research.uobkayhian.com/ 2017-10-19

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.900 Same 1.900