Keppel Telecommunications & Transportation - UOB Kay Hian 2018-08-28: Awaiting The Turnaround; Downgrade To HOLD

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KEPPEL TELE & TRAN SGX:K11

Keppel Telecommunications & Transportation - Awaiting The Turnaround; Downgrade To HOLD

• Keppel Telecommunications & Transportation’s earnings are likely to be lacklustre in the near to medium term as the business gradually transforms. Upside exists in new datacentre developments, which remain on the horizon.
• Despite a lack of catalysts, Keppel Telecommunications & Transportation’s share price has fallen below intrinsic value, albeit with limited upside.
• We slash our 2018-20 earnings estimates by 25-33%. Until catalysts or new developments emerge, downgrade to HOLD with a target price of S$1.51. Entry price: S$1.36.

WHAT’S NEW

Datacentre: Earnings likely dismal for 2H18; developments remain on the horizon.

• Keppel Telecommunications & Transportation’s (KTT) datacentre segment will likely continue to be a drag in 2H18 due to elevated staff costs. Our channel checks suggest that the ramp- up is likely in preparation for several datacentre projects that KTT is pursuing and possibly overseas.
• Contributions, derived from fee management income, may only kick in materially from next year. Our estimates currently do not account for these projects but take into account the elevated headcount costs.

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Logistics: Breakeven earliest by late-19.

• Despite the good traction for UrbanFox, the logistics segment will likely continue to post losses on start-up costs and upfront expenses. We expect a pick-up in revenue at end-18, with breakeven earliest by end-19.

EARNINGS REVISION

Assuming coverage, slash 2018-20 net profit forecasts by 25-33%.

• Our estimates have been revised down sharply for 2018, largely on cuts to datacentre earnings. Logistics sees a widening of losses as we input a longer runway for its turnaround. 
• Our revised core earnings for 2018-20 are now S$34m (-26%), S$32m (-33%) and S$35m (-25%) respectively.

STOCK IMPACT

Gradual transformation dampens outlook for next few quarters.

• Growth will likely be driven by the new datacentre projects that KTT is pursuing, which could add S$5m-6m p.a. in development fee income. Until these materialise, earnings upside is not apparent.

Implied valuation for residual businesses unduly low.

• The combined value of KTT’s listed entities makes up 87% of current market cap. The residual value implies near zero value for KTT’s self-owned datacentre business, and ~0.4x P/B for its logistics business. As reference, logistics names with comparable returns in Singapore and Hong Kong are trading at historical 0.5x and 0.9x 2019F P/B respectively. We think this is an attractive level for one to take back the business and benefit from the upside later.

VALUATION/RECOMMENDATION

Downgrade to HOLD, target price reduced to S$1.51.

• We have revised our valuation multiples. Logistics is pegged to 0.8x 2019F P/B (previous: 1.0x), datacenter to 8x 2019F PE (previous: 30x), M1 at our target price of S$1.55 and market value for the rest.
• Until the datacenter project manifest or other catalysts develop, we expect lacklustre share price performance.
• Downgrade to HOLD. Entry price is S$1.36.

Foo Zhi Wei UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-08-28

SGX Stock Analyst Report HOLD Downgrade BUY 1.51 Down 1.750