Keppel T&T - Bear with the expansion phase

■ 3Q15 core net profit of S$15.3m (-4% qoq) was slightly below due to higher depreciation of its Singapore logistics assets. 9M was 68% of our FY15 forecast.

■ KPTT is on track to divest T27 to Keppel DC REIT in early 2016, which would rev up the asset recycling engine and allow it to speed up its investments in DC assets.

■ We cut our FY15-16 EPS by 2-9% but raise FY17 by 6% to reflect the delay in the opening of the China logistics projects.

We maintain our Add rating, with re-rating catalysts from the addition of new assets.

Logistics disappointed in 3Q15…
Logistics revenue fell 4% qoq to S$38.1m in 3Q. Operating profit fell by a larger 18% qoq to S$2.9m due to higher depreciation charges for the Singapore assets.

Net profit fell 59% qoq to S$0.8m, driven by lower associates contributions from:
1) Asia Airfreight Terminal, which saw intensifying competition in Hong Kong and

2) Wuhu Sanshan port, which recognised a slowdown in bulk cargo in China.

KPTT also recognised increased competition in ASEAN, and is increasingly focused on providing value-added services.

…but should improve with the opening of new assets
We expect the disappointment to be short-lived ‐ Tampines Logistics Hub’s occupancy should improve from 60% to more than 70% in 4Q as tenants move in. The opening of the Tianjin Eco-city distribution centre in end-2015 and Lu’An logistics park in early 2016 should relieve some pressure from startup costs, with strong demand already seen for the former. KPTT has also recently won e-commerce contracts in Singapore and Indonesia, which are expected to be implemented in the coming quarters.

Data centre segment continues to be the star
Data centre revenue grew 38% qoq to S$12.8m, driven by the ramp-up in occupancy at T27, as well as higher management fees earned from Keppel DC REIT. Net profit grew by a similar 36% qoq to S$7.8m. Almere 2 opened in recent weeks, with 40% of the space already committed to one tenant, while phase 1 of Keppel Datahub 3 is expected to be completed in end-2016. KPTT continues to see strong demand for data centre space in Singapore and ASEAN, and is on the hunt for more acquisitions.

Asset recycling engine revved on
KPTT remains on track to divest T27 to Keppel DC REIT in early 2016. We estimate that the carrying value of T27 on KPTT’s balance sheet is S$127m-137m (recognised at cost and subsequently remeasured at fair value). This compares with an appraised value of S$224m in Dec 2014, which translates into a potential disposal gain of S$61m-68m for KPTT’s 70% stake. We expect most of the funds to be kept for reinvestments into new data centre projects, to meet KPTT’s target of injecting one asset per year into the REIT.

Technical Analysis
Daily Chart
We maintain an Add
KPTT’s growth story remains intact, with asset recycling to drive more aggressive growth in the data centre space. Earnings have been depressed by startup costs associated with its new logistics and data centre facilities, but we expect this to improve as revenue starts to flow from these projects in 4Q15-2016. KPTT is trading at 9x forward P/E, which we view as attractive given its growth prospects. Maintain Add, with a higher SOP-based target price of S$1.91 as we roll over to FY16. (Read Report)

Source : CIMB Research

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