Growth from within
OUTPERFORM - Maintained
▊ Keppel T&T has been aggressively expanding its core operations, with four new logistics facilities and a third data centre slated to open in FY14-15. These projects will allow the company’s earnings profile to rely more on its core businesses and less on its investment in M1. We factor in contributions from the new logistics parks in China and Singapore, which raises FY13-15 EPS by 2-6%. Our SOP-based target price inches up to S$1.65. We maintain our Outperform call, with new logistics facilities and data centre additions as catalysts.
Change in earnings profile
Historically, Keppel T&T has relied on its associates’ contributions to drive earnings growth; 71-82% of its earnings come from its 20% stake in M1. With the addition of four new logistics facilities and a third data centre in FY14-15, we believe the company’s core logistics and data centre operations can contribute to 31-40% of PBT in FY13-16, a significant increase from its historical 17-29% since FY07. In the long term, we believe Keppel T&T’s holding company discount can narrow from its historical 20-25% to 10-15% when it builds up its core.
Logistics and data centre expansion to drive earnings growth
We estimate that the four new logistics facilities will add 144,000sm of warehouse space to the current 229,000sm of space owned by Keppel T&T and its subsidiaries. Given the sheer size of these new facilities, we forecast yoy logistics revenue growth of 16-30% in FY14-15 and we expect the logistics segment to contribute to 39-45% of our earnings growth forecasts for FY14-15. The third data centre, Keppel Datahub 2, will add 6,000sm to the current 12,300sm of data centre space that Keppel T&T runs in Singapore. We expect data centres to contribute to 31% of our earnings growth forecasts in FY14-15.
Keppel T&T is currently trading at 10.1x rolling forward P/E, 1 s.d. below its historical mean of 11.8x. We believe these valuations are undemanding given the 12-18% earnings growth we forecast for FY13-15 with the addition of new logistics and data centre facilities. Our SOP-based target price of S$1.65 implies 13.2x forward P/E (1 s.d. above mean), which we believe is warranted given the strong earnings growth.
Publish date: 25/09/13