Keppel Telecommunications & Transportation (KPTT SP) - UOB Kay Hian 2018-01-25: 4Q17 Rounding The Corner

Keppel Telecommunications & Transportation (KPTT SP) - UOB Kay Hian 2018-01-25: 4Q17 Rounding The Corner KEPPEL TELE & TRAN K11.SI

Keppel Telecommunications & Transportation (KPTT SP) - 4Q17 Rounding The Corner

  • Keppel Telecommunications & Transportation (KPTT) reported a 4Q17 core net profit of S$0.3m, below expectations. 
  • Earnings were marred by one-off expenses from the logistics and data centre segments. The ramp up in data centre expenses hints at an upcoming mega project that will spur an earnings turnaround for the segment. 
  • The strategic review for logistics remains ongoing and is positive for shareholders. 
  • We trim our 2018-19 earnings forecasts by 3- 4% on an adjustment to interest expenses. Maintain BUY with target price of S$1.90.



RESULTS


4Q17 core net profit of S$0.3m; below expectations. 

  • Keppel Telecommunications & Transportation (KPTT) reported a headline net profit of S$17.1m (+456% y-o-y), boosted by one-offs:
    1. S$16.2m fair value gains on reclassification of an associate to other investments (Asia Airfreight Terminal), and
    2. gain on disposal of Trans-ware Logistics.
  • Excluding this, core net profit was S$0.3m (-87% y-o-y). Results were significantly below our expectation.

Helped by better performance from associate KDC Reit. 

  • Lifting KPTT’s core operational earnings were associate contributions, namely from Keppel DC Reit (KDC Reit). Net property income from KDC Reit for 4Q17 was S$32.6m, up 31% y-o-y, helped by acquisitions of KDC DUB2, Milan DC, Cardiff DC and the 90% interest in KDC SG3. This formed the bulk of the 16% y-o-y improvement for KPTT’s earnings from associates and JVs.

Core operations hit by continued weak performance and one-off expenses. 

  • The logistics segment saw the launch of UrbanFox during the quarter, which incurred various start-up expenses. These expenses are expected to remain a facet of earnings over the next few quarters. Singapore operations remain weak, while its China operations remain a drag, with Tianjin continuing to underperform. 
  • For the data centre segment, a core operating loss was noted for the quarter, owing to
    1. one-off expenses from ramp-up of staff capabilities and strength; and
    2. a one-off maintenance expenses for its data centres. 
  • Earnings contribution from Almere 2 remained stable, as was contribution from data centre facility management services.

Lower fair value gain from disposal of AAT. 

  • Owing to a depreciation of the Hong Kong against the Singapore dollar, the gain on disposal of Asia Airfreight Terminal (AAT) was reduced from S$19m to S$16.2m. 
  • Negotiations remain on-going, and we expect the transaction to go through.

Dividend of 3.5 S cents declared. 

  • Despite the lacklustre performance for 2017, KPTT declared a dividend of 3.5 S cents, translating to a payout ratio of ~70% against core earnings. Ex-date is 25 April, with payout date on 9 May.


STOCK IMPACT


Bright outlook for data centre division continues. 

  • Demand for data centres remains hot with a bright outlook for KPTT’s data centre division as the company continued to secure new contracts for its data centre facilities. 
  • Currently, KDC SG 4 has secured commitments from key customers and has embarked on the second phase of fit-out while a partnership has been fostered with the Singapore Internet Exchange to establish a peering platform at KDC SG 1 to provide enhanced connectivity and lower operating costs.

Mega project incoming for data centre segment, the largest yet. 

  • Looking at its development cycle and the increase in staff cost for 4Q17 (similar to KDC SG 4’s design and pre-engineering phase but on a larger scale), we are now more confident that a mega project is coming for KPTT’s data centre division. 
  • Judging from the size of the increase in staff costs, we believe that this mega project will be KPTT’s largest data centre project yet. As data centre demand remains hot, we believe that this new project will be well received and once completed, will be a new driver for KPTT’s profit.

Strategic review of logistic assets a big positive and will unlock value for shareholders. 

  • After announcing the divestment of a Sri Lankan logistics JV in Oct 17 and the subsequent strategic review of its China logistics assets in Nov 17, we believe that KPTT will continue to rationalise and dispose of its loss-making logistics assets.
  • Such an event is a big positive for KPTT’s shareholders as the logistics segment has been underperforming for some time and any such disposal will help turn around logistics’ weak operational performance. This will also unlock value with potential upside as KPTT could sell at book value or even a reasonable profit given the current global asset inflation situation, particularly for Chinese assets.


EARNINGS REVISION/RISKS 


Lower 2018-19 earnings forecasts by 3-4%. 

  • A large part of our earnings assumption hinges on the manifestation of new, mega DC projects that allow KPTT to reap fee income. We have largely left those assumptions unchanged, but have lowered earnings forecasts as we raise our interest expense assumptions. 
  • Our revised 2018-19 earnings forecasts are at S$52m (-3%) and S$52m (-4%). Earnings assumption for 2020 is introduced at S$53m.


VALUATION/ RECOMMENDATION


Maintain BUY, target price unchanged at S$1.90. 

  • Our target price remains unchanged at S$1.90 but with some adjustments to our SOTP valuation. We now value KPTT’s logistics assets at book value (1.0x 2018F P/B) as the disposal of these assets at book (or higher) should not pose considerable difficulties given the inflated asset market. However, weaker-than-expected data centre results net off that gain.
  • Management had previously guided for a lacklustre 2017 as KPTT undergoes a business model transformation but we had underestimated the impact. Nonetheless, we share management’s optimism for its data centre division in 2018 as 2017 represented the last cost hurdle before meaningful earnings from new projects can flow through.







Edison Chen UOB Kay Hian | Foo Zhi Wei UOB Kay Hian | http://research.uobkayhian.com/ 2018-01-25
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.900 Same 1.900



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