OUTPERFORM - Maintained | S$1.53 - TP: S$1.92
▊ Keppel T&T’s 3Q13 operating margins fell to a seven-quarter low of 10.5%. Both the logistics and data centre segments were affected by higher operating costs. We believe the margins are likely to stay depressed ahead of the opening of new facilities in FY14-15. 9M13 net profit of S$45.5m, at 75% of our full-year forecast, was in line with our estimates. We maintain our EPS forecasts, but roll forward our valuation to CY15 earnings which raises our SOP-based target price to S$1.92. We maintain Outperform and see the new facilities as catalysts for the stock.
Rise in operating expenses
Operating margins fell to 10.5% in 3Q13 (2Q13: 16.4%) due to higher operating expenses in both logistics and data centre segments. EBIT margin for the logistics segment fell to 8.6% (2Q13: 10.4%), while it fell to 40.4% for the data centre segment (2Q13: 49.4%). Equipment rental and facilities expense rose 27% qoq on the back of higher maintenance and equipment rental costs. Purchase of goods rose 4% qoq due to higher freight, transportation and delivery fees in China, while the staff costs increased by 2% qoq due to the ramp up in hiring in tandem with the construction of Keppel Datahub 2 (KDH2) and four new warehouses.
Margins likely to remain depressed in the near term
We believe that margins are likely to stay depressed ahead of the opening of the new facilities in FY14-15 as staff and building costs are incurred before any operating earnings can be generated. We believe the logistics segment’s margins will remain depressed for a longer period of time as the four new warehouses are of a larger scale and will take longer to build. Most of the new staff for KDH2 have already been hired and the data centre segment’s margins are likely to improve in 1H14 as the new facility starts generating income.
Keppel T&T is currently trading at 10.6x rolling forward P/E, 1 s.d. below its historical mean of 11.7x. We believe these valuations are undemanding given the potential earnings growth from the new facilities.
Publish date: 17/10/13