Building its core
KPTT has historically relied on its 20% investment in M1 to drive the bulk of its earnings growth. However, this is changing as KPTT is aggressively expanding both its logistics and data centre segments, which will reduce its holding company discount to 10-15%.
We revise our stock rating to Add from Outperform following a change in our recommendation structure. Our SOP-based target price remains unchanged at S$1.92 (12.1x CY15 P/E for core earnings). Catalysts include the opening of new logistics warehouses and a third data centre.
Change in earnings profile
Historically, KPTT derived 71-82% of its earnings from its 20% stake in M1. But with the addition of four new logistics facilities and a third data centre in Singapore in FY14-15, we believe the company‟s core operations can contribute up to 40% of PBT in FY14-16, a significant increase from its historical contribution of 17-29% since FY07. In the long term, we believe KPTT‟s holding company discount can narrow from 20-25% to 10-15% when it builds up its core.
Growth engine 1: logistics
KPTT plans to open three new logistics parks in China and one in Singapore by FY15, which will add c.144,000 sq m to the current 229,000 sq m of warehouse space.
We estimate that the four new facilities will contribute to 16-30% revenue growth for the logistics segment. The China logistics projects are focused on serving the agricultural industry, where KPTT can leverage its expertise in cold chain logistics to tap the growing demand for such services in China. Meanwhile, the logistics park in Singapore will serve niche industries such as aerospace, biomedical and precision engineering, and can command higher margins due to value-added services that KPTT can provide on-site.
Growth engine 2: data centre
KPTT plans to open its third data centre in Singapore in early FY14. The new facility, named Keppel Datahub 2 (KHD2), will add 6,000 sq m of data centre space to the current 12,300 sq m occupied by its two existing data centres. According to a data centre consulting firm, Broadgroup, demand for data centre capacity in Singapore is expected to increase 50% from 2.4m sq ft in 2010 to 3.6m sq ft in 2015. Given KPTT‟s strong track record in running high-quality data centres and its loyal customer base of blue chip clients, we believe KPTT can secure high occupancy rates at KDH2.
Publish date: 29/11/13