Keppel Telecommunications & Transportation - UOB Kay Hian 2018-09-17: Takeaways From KDC SG4 Site Visit

KEPPEL TELE & TRAN (SGX:K11) | SGinvestors.io KEPPEL TELE & TRAN SGX:K11

Keppel Telecommunications & Transportation (KPTT) - Takeaways From KDC SG4 Site Visit

  • Our visit of KDC SG4 indicates that the outlook for hyperscale datacentres remains bright. Demand remains strong and continues to outstrip projections. However, KPTT’s growth has been limited by the availability of developable assets.
  • Growth is likely to come from overseas developments in the meantime. ADCF could allow KPTT to more than double the number of projects being developed at the same time, from each of which KPTT can reap development fees.
  • Maintain HOLD with target price at S$1.51. Entry price: S$1.30.



WHAT’S NEW

  • We were hosted by Keppel Telecommunications & Transportation’s (KPTT) management for a tour of KDC SG4, which was followed by a discussion on its business outlook.

KDC SG4 to see full-occupancy by end-18.


~ SGinvestors.io ~ Where SG investors share
  • KDC SG4 is a 20MW datacentre designed to cater to hyperscale cloud providers such as Amazon and Microsoft Azure. Despite its specifications, it also reserves about 5-10% of capacity for retail co-location, which have higher rates. The datacentre is currently 60% occupied, and is expected to reach full occupancy by the end of 2018.

Divestment potential in the near-term.

  • KDC SG4 is currently held by Thorium DC Pte Ltd, in which KPTT holds a ~53% effective stake through Keppel Data Centres Holding and the Alpha DC Fund (ADCF). Upon reaching full occupancy, KDC SG4 is likely to be divested, to which Keppel DC REIT (SGX:AJBU) holds a right-of-first-refusal on the asset.
  • ~ S G investors.io ~ Where SG investors share

Hyperscale datacentre demand remains strong.

  • Demand for hyperscale datacentres remain very strong, with demand continuing to outstrip cloud providers’ internal projections. This remark is supported by Facebook’s recent announcement to develop a S$1.4b datacentre in Singapore, which we estimate to be > 100MW in size.
  • Despite the strong demand, KPTT has been constrained by the availability of assets to acquire and convert into datacentres over the past quarters.

Seeking growth from overseas projects.

  • Management has not been idle, and has ventured overseas to seek new development opportunities. Given the additional due diligence required, this has taken more time than expected.
  • While growth remains strong in tier-1 cities, demand is starting to trickle down to tier-2 cities like Jakarta, Ho Chi Minh and Bangkok. The recent partnership with Salim Group in Indonesia is a prime example, which sees the development of a 5MW datacentre for the first phase. Development fees are expected out of this, which we estimate to be 3-5% of an estimated total development value of S$60m-80m.
  • ~ S G investors.io ~ Where SG investors share

Further overseas projects in the pipeline.

  • Our hypothesis that KPTT had increased datacentre staff count in anticipation of more projects was not unfounded. Management’s response suggests at least one more overseas project in the pipeline that could manifest itself by the year-end. Staff count could double from present levels, suggesting that KPTT envisions several new projects in the near term.

Supercharging growth via the ADCF.

  • We had flagged the potential that ADCF brought to KPTT in terms of projects. With the funds available, KPTT can potentially more than double the number of datacentre projects it is undertaking concurrently. Assuming each project is 20MW in size, we expect development fees of S$5m-7m p.a. for each project undertaken.


STOCK IMPACT


Fundamentals intact, expect better visibility only in 2019.

  • Market fundamentals for the datacentre business remain intact, and are more positive than we had expected. However, translation into earnings may remain elusive for the time being. Earnings upside will likely manifest itself only in 2019, when development fees from the overseas projects kick in. This is expected to be small, and could be dampened by additional staff headcount taken in preparation for more projects. Additionally, weak logistics earnings could be a drag at least until 2H19. ~ S G investors.io ~ Where SG investors share
  • Overall, business prospects are positive, but earnings growth visibility is probably more likely only in late-19.


EARNINGS REVISION/RISKS

  • No change to earnings estimates.


VALUATION/RECOMMENDATION


Maintain HOLD, target price unchanged at S$1.51.

  • The 6% drop in share price for Keppel DC REIT (SGX:AJBU) has lowered our SOTP valuation to S$1.48. Given the 2% variance, we leave our target price of S$1.51 unchanged.
  • While value has emerged, we prefer to wait on the sidelines until visible catalysts manifest. KPTT has seen multiple delays in its business plans over the past few quarters that have upended expectations. We remain cautious and keep our HOLD recommendation.





Foo Zhi Wei UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-09-17
SGX Stock Analyst Report HOLD Maintain HOLD 1.510 Same 1.510



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