Keppel T&T downgraded by UOB KayHian, citing lackluster earnings

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UOB KayHian downgraded Keppel Telecommunications & Transportation to Hold from Buy, saying earnings were likely to be lackluster in the near-to-medium term amid logistics start-up costs and the data center ramp up.

“Keppel Telecommunications & Transportation’s (KTT) data center segment will likely continue to be a drag in the second half of 2018 due to elevated staff costs,” the brokerage said in a note on Tuesday. “Our channel checks suggest that the rampup is likely in preparation for several data center projects that KTT is pursuing and possibly overseas. Contributions, derived from fee management income, may only kick in materially from next year.”

For the logistics segment, UOB KayHian said it expected breakeven might not occur for a year, at the earliest.

“Despite the good traction for UrbanFox, the logistics segment will likely continue to post losses on start-up costs and upfront expenses.
We expect a pick-up in revenue at end-2018, with breakeven earliest by end-2019,” it said.

It cut its 2018-20 earnings forecasts by 25-33 percent, largely on cuts to data center earnings and a widening of logistics losses; It noted its estimates account for the data center segment’s elevated headcount costs, but not the projects.

It expected that growth ahead would be driven by the new data center projects KTT is seeking, potentially adding S$5 million to S$6 million a year in development fee income, but it added that until it materializes, earnings upside wasn’t apparent.

But it noted that the market’s implied valuation for Keppel T&T’s residual businesses was “unduly low,” implying nearly zero value for its self-owned data center business and a below-peer valuation of the logistics business.

It cut its target price on Keppel T&T to S$1.51 from S$1.75, and set an entry price of S$1.36.

“Until the datacentre projects manifest or other catalysts develop, we expect lackluster share price performance,” UOB KayHian said.

The stock was flat at S$1.40 at 9:23 A.M. SGT on Tuesday.


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