Keppel Telecommunications & Transportation (KPTT SP) - UOB Kay Hian 2018-04-18: 1Q18 Still Turning The Corner

Keppel Telecommunications & Transportation (KPTT SP) - UOB Kay Hian 2018-04-18: 1Q18 Still Turning The Corner KEPPEL TELE & TRAN K11.SI

Keppel Telecommunications & Transportation (KPTT SP) - 1Q18 Still Turning The Corner

  • KPTT’s 1Q18 net profit of S$9.4m was 18%/18% of UOBKH and consensus forecasts, below expectations. Both the logistics and data centre segments remained weak, with the former swinging into a loss owing to initial set-up costs for UrbanFox.
  • Higher staff costs to support new business developments continued to mar results.
  • Upside is still likely to come from the data centre segment. We cut our net profit forecasts by 6-10%. 
  • Maintain BUY with a lower target price of S$1.75.



1Q18 net profit of S$9.4m, below expectations. 

  • Keppel Telecommunication & Transportation (KPTT) reported a 1Q18 net profit of S$9.4m, forming 18%/18% of UOBKH and consensus estimates, below expectations. The lower earnings were attributed to higher operating expenses stemming from the logistics and data centre segments.

Logistics: Swung into a loss. 

  • The logistic segment swung from profit of S$1.4m in 1Q17 to a loss of S$1.3m for 1Q18. This was largely due to a rise in overheads and staff costs to support new developments for UrbanFox
  • The China portfolio remained in losses comparable to that in 1Q17.


Data centre: Remained soft. 

  • Operating profit for the segment rebounded from a loss of S$0.15m in 1Q17 to a profit of S$0.7m in 1Q18, largely due to higher revenue related to rendering of data centre co-location and other services. We understand that some development revenue relating to the phase 2 fit-out of Keppel DC Singapore 4 was recognised. 
  • Almere 2 remained stable with unchanged occupancy of 40%. 
  • Staff costs remained elevated as KPTT increased headcount to support new business developments.


Associate earnings fell 4% y-o-y on potential losses in other associates. 

  • Associate net profit was S$16.0m (-4% y-o-y) for 1Q18. This was largely due to potential losses in other associates’ earnings, as Keppel DC REIT (+5.4% y-o-y) and M1 (-3.0% y-o-y) reported earnings that were comparable to 1Q17’s. 
  • The logistics segment continued to report associate losses, largely unchanged on a q-o-q or y-o-y basis. Due to the adoption of SFRS(I) 15 from 1 Jan 18, associate earnings for 1Q17 have been re-stated, lowering the historical figure by 1.8%.


AAT talks on-going, expected to be completed soon. 

  • The deal remains intact, with KPTT working to fulfil the conditions precedent to close the transaction. No firm timeline was provided.


STOCK IMPACT


Demand for data centres remains hot. 

  • In KDC SG4, KPTT is making good progress in its phase 2 fit-out, with targeted completion by 2Q18. A healthy occupancy rate has been secured and a pipeline of interests from key customers continues. It is also intensifying efforts to pursue new asset development and acquisition opportunities to expand into new markets. 
  • The announcement of KPTT's partnership with DE-CIX should also help with the overall attractiveness and occupancy of KDC FRA 1. With demand for the data centre remaining hot, we believe KPTT remains a preferred candidate for quality projects.

Positive upside from data centre. 

  • We believe that with KPTT hiring new engineers, a mega project is likely coming for its data centre division. 
  • In its 1Q18 results, KPTT attributed the increased manpower cost to the support of new business developments in the data centre division. We remain confident that a mega project is on the verge of being unveiled and urge investors to await the good news that will come soon.

Channel start-up UrbanFox gaining traction. 

  • While operating expenses have increased due to the setting up of its new omnichannel UrbanFox, it is proving to be a success, gaining traction with new account wins in channel management and last-mile deliveries. 
  • Our channel checks indicate its growing presence in the market and management has indicated that the traffic and number of brands onboard are ahead of schedule. KPTT has also increased its stake in UrbanFox from 59.6% to 85%, marking its confidence to capture growth in the e-commerce market. 
  • For expansion in the region, UrbanFox has partnered SmartOSC, a leading e-commerce agency, to jointly promote their end-to-end e-commerce services to retailers across Southeast Asia. As such, given time, we believe UrbanFox will contribute to bottom line.

China logistic assets on track for strategic review. 

  • While KPTT's China logistics continues to drag overall operations (with weaker contributions in 1Q18), we note that the strategic review for the related China assets is still on track, following the divestment of its Sri Lankan logistics assets. This may take some time but we opine that it will provide an overall boost, unlocking value as KPTT could sell at book value or even at a reasonable profit, given the current global asset inflation situation, particularly for Chinese assets.


EARNINGS REVISION/RISKS


Lower 2018-19 earnings forecasts by 6-10%. 

  • We cut our data centre earnings forecasts by 15-18% and revise the estimates for the logistics segment to reflect a loss for 2018. 
  • Our revised 2018-20 net profit forecasts are S$46m (-9%), S$47m (-6%) and S$46m (-10%) respectively. Downside risk to our operating profit forecast exists.


VALUATION/RECOMMENDATION


Maintain BUY and reduce our target price to S$1.75. 

  • The variance in our target price is due to an even split between our lower target price of S$1.60 for M1 (previously S$1.84) and our 15% downward earnings revision for the data centre business in 2018, which is pegged to 30x 1-year forward PE. 
  • Maintain BUY as we believe the data centre division will soon turn the corner.







Edison Chen UOB Kay Hian | Foo Zhi Wei UOB Kay Hian | http://research.uobkayhian.com/ 2018-04-18
SGX Stock Analyst Report BUY Maintain BUY 1.75 Down 1.90



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