SINGAPORE (April 19): UOB Kay Hian is maintaining its “buy” on Keppel Tele & Trans (Keppel T&T) with an unchanged target price of $2.51.
As the preferred vendor for cloud-enabled data centres in the region, UOB expects KPTT’s earnings to rebound in 2H17 driven by strong demand for its data centres.
“Given the earnings potential of its data centres, it should trade at about 30x forward PE like peer SUNeVision (29x forward PE) instead of current implied 13-14x forward PE,” says lead analyst Edison Chen in a Wednesday report.
In 1Q17, KPTT reported net profit of $11.6 million, 13% lower from a year ago primarily due to lower profit contribution from KDC SG3 (T27), which has been divested and now accounted for as an associate stake.
(See also: Keppel T&T 1Q earnings drop 13% to $11.6 mil on lower revenue)
Its logistics division posted 46% y-o-y lower operating profit of $1.4 million on lower revenue in Singapore due to intense competition while the data centre division reported a temporary operating loss due to higher staff and SG&A costs to capture new opportunities in the data centre market.
Still, Chen expects 1H17 to be weak as KPTT undergoes a transition to enter its next phase of growth although demand for its data centres should remain strong, maifesting in high occupancy rates for T20 and the new PCCW Global – Keppel ICX (HK) data centre.
“Earnings for the former is expected to kick in during 2Q17 with an immediate 25% take-up rate, while the latter will likely contribute from 4Q17 onwards,” adds Chen.
Meanwhile, the logistics sector is looking increasingly “hot” with the recent GLP and CWT M&A announcements. KPTT’s logistics arm is already a beneficiary of this shifting trend with the HK$250 million ($45 million) sale of its 10% stake in the Asia Airfreight associate, representing a disposal gain of $19 million.
As the M&A trend continues, Chen says KPTT is well positioned to dispose of more non-core assets and recycle capital to focus on its core businesses.
“Given $291.8 million NAV for its logistic segment, we note the potential upside even if the entire logistics segment is valued at 1.0x P/B. However, we opt to maintain our conservative stance with our 10x forward PE valuation,” concludes Chen.
Shares of KPTT are down 1 cent at $1.74.
