Monday, January 27, 2014

Keppel T&T -Await a better entry point (CIMB)

Keppel T&T
Current S$1.86
Target S$1.94
Await a better entry point

FY13 net profit of S$63.2m was broadly in line with our expectation and formed 102% of our full year estimate. We revise up our FY14-16 EPS by 2-3% for the higher-than-expected margins, with a slightly higher SOP-based target price of S$1.94. However, we downgrade the stock from Add to Hold as we believe that the positives have largely been priced in. The share price has rallied since KPTT announced its intention to inject its data centres into a REIT in 1H14, which we think has been overdone. While we are positive on the news, we believe it will take time for KPTT to reinvest the funds raised from the IPO to make a meaningful impact on its earnings.

4Q13 highlights
Strong core performance. The logistics segment reported strong revenue of S$29.7m (+14.5% qoq) and operating profit of S$3.9m (+73.7% qoq). This is attributable to: 1) higher occupancy and rentals at its warehouses in Southeast Asia, and 2) seasonally stronger earnings from its ports in China. The data centre segment also did well, with S$15.0m in revenue (+14.3% qoq) and S$8.0m in operating profit (+50.2% qoq). This was due to higher occupancy at its Singapore data centres and an increase in management fees.

Margins surprised on the upside. Operating margin expanded to 20.2% in 4Q (3Q: 10.5%), as operating expenses contracted 1.4% qoq despite 10.6% qoq revenue growth. Net margin also expanded to 39.7% (3Q: 34.8%).

Data centre REIT will be positive, but in the longer term
KPTT’s share price has run up 20% since the company announced its intention to establish a data centre REIT. While we are positive on this move, we believe it may take time for KPTT to acquire new assets and recognise earnings growth. KPTT may also face short-term earnings pressure after the REIT’s IPO given that it can no longer recognise 100% of its data centre earnings. Data centres contributed to 74% of operating profit and 26% of PATMI in 2013.

Valuations are no longer compelling
KPTT is trading at 12.5x forward P/E (0.6 sd above its 5-year mean), which is no longer compelling, in our view. Our S$1.94 target price implies 13x forward P/E (1 sd above its 5-year mean), which we believe adequately reflects the strong EPS growth of 14-17% in FY14-15. We believe that investors should wait for a better entry point.

. Data centre REIT will drive earnings growth in the long-term We are positive on the data centre REIT. The REIT will allow KPTT to unlock the value of its data centre assets and reinvest the funds into new data centre or logistics facilities. This way, KPTT can grow its core earnings and reduce its dependence on its 20% stake in M1, which may narrow the holding company discount in the long term. By raising funds through the REIT, KPTT can also reduce its reliance on its parent, Keppel Corp to fund its projects going forward.

But a positive impact on earnings will only come later. While the market has reacted positively to news of the potential REIT IPO, we believe it may take some time for KPTT to acquire new assets and recognise earnings growth from these new warehouses or data centres. Furthermore, KPTT may also face short term pressure on its earnings growth after the REIT IPO given that it will no longer recognise 100% of earnings from its data centre operations. In 2013, the data centre segment contributed to 74% of operating profit and 26% of PATMI.

Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date: 22/01/11

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