Keppel Tele & Tran - Record operating profits (CIMB)

S$1.37 Target: S$1.61

OUTPERFORM Maintained

Mkt.Cap: S$757m/US$623m

• In line; maintain OUTPERFORM with higher TP of S$1.61 (from S$1.57). 2Q11 core net profit (S$14.9m, +8.2% yoy) came largely in line with our expectations. 1H11 core net profit formed 42% of our FY11 estimate. Key variances came from i)a slightly lower-than-expected topline offset by lower-than-expected operating costs leading to higher-than-expected margins, and ii) higher-than-expected depreciation and interest expense. Therefore, we tweak our operating expense assumptions, leaving our FY11-13 EPS estimates largely unchanged. However, our SOP-based target price rises from S$1.57 to S$1.61, as we peg M1’s market cap to our target. KPTT achieved record operating profit this quarter, which reflects the success of its efforts to strengthen its core operations. KPTT remains an OUTPERFORM and rerating catalysts could come from accretive data centre acquisitions and faster-thanexpected penetration into China.

• Core operations starting to contribute. Core operating profit came in at a record S$5.6m (+141% yoy, +31% qoq) as KPTT’s data centre operations started to contribute meaningfully. We also saw margin expansion in this quarter. The operating margin was 20.0% (+11.0% pts yoy, +6.0% pts qoq).

• Associates contributions. Associates contributed S$15.4m before tax (-6% yoy), with 56% attributable to M1 (S$8.6m) and 44% (S$6.8m) attributable to KPTT’s logistics, data centre and telco-related associates.

• Gearing increased. KPTT’s 2Q11 net gearing rose slightly from 0.56x to 0.62x. We believe this was due to ongoing capex required for its warehouse expansion plans in Singapore and Nanhai, China.

• Data centre updates. From our recent discussions with management, we sensed that demand for data centre services remained robust not only in Singapore but also globally. We believe management is on the prowl for accretive data centre acquisitions or could develop a new data centre to increase capacity.

• Expansion in China. Galvanising its involvement in Tianjin Eco-city, KPTT has recently signed an MOU in Jilin, China, to explore opportunities to develop a Jilin Food zone. Management sees opportunities to export its FMCG supply chain expertise into logistically-constrained cities in China.