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Singapore Company Focus

Keppel Telecommunications & Transportation


Bloomberg: KPTT SP

Reuters: KTEL.SI

DBS Group Research . Equity

24 Jun 2011

BUY S$1.20 STI : 3,044.72


(Initiating Coverage) Price Target : 12-Month S$ 1.65 Reason for Report : Iniitiation of coverage Potential Catalyst: Acquistion of data centre space Analyst Sachin MITTAL +65 6398 7950 sachin@dbsvickers.com

Riding on two mega trends


KPTT is positioned to benefit from rising data usage & logistics outsourcing trend New management is keen to invest and grow datacentre business, not reflected in the share price Excluding M1, the core business is trading at only 6x FY11F PE. Initiate with BUY for over 35% upside potential to our S$1.65 TP.
R elative In d ex 300

Price Relative
S$

5.60 250 4.60 3.60 2.60 1.60 0.60 2007 200 150 100 50 2011

2008

2009

2010

K e p p e l T e lecom m un ica tio n s & T ra n sp o rta tion (LH S) Re la tive ST I IN D E X (R H S)

Forecasts and Valuation


FY Dec (S$ m) 2009A 2010A 2011F 2012F

Twin engines of growth - Data centre & Logistics. Next Generation National Broadband Network and growth in cloud computing are fuelling demand for data-centre space in Singapore. KPTT is the only listed player in Singapore with significant exposure to data-centre business and is among the Top 5 players in Singapore. Besides, KPTT is positioned to benefit from increasing trend of logistics outsourcing to third party players in China and South East Asia. Recently acquired Keppel DigiHub data centre in Singapore and newly built Nanhai Distribution Centre in China are the key growth drivers for 2011F. New management is keen to invest and grow datacentre business. KPTT has set up a dedicated fund (initial closing of US$100m) to invest in Shariah compliant data centres globally in an alliance with Saudi Arabia-based Al Rajhi Holding Group. Ever since the appointment of new management in Jan 2010, KPTT is focusing on growing datacentre & logistics business with lesser emphasis on the legacy business of network engineering. Core business is deeply undervalued. Excluding M1, the core business is trading at only 6x FY11F PE based on our conservative estimates. Global data centre players like Equinix and Digital Realty Trust trade at 40-50x PE, reflecting higher growth in the sector. Initiate with BUY for 35% upside potential to our SOP-based TP of S$1.65.
At A Glance Issued Capital (m shrs) Mkt. Cap (S$m/US$m) Major Shareholders Keppel Corp Ltd (%) Kapital Asia Pte Ltd (%) Free Float (%) Avg. Daily Vol.(000) 553 663 / 537 80.1 5.3 14.6 67

Turnover EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth Pre Ex (%) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Consensus EPS (S cts): Other Broker Recs:

113 73 57 45 53 8.1 9.6 4 8.1 2.8 53.6 14.9 12.5 nm 11.3 2.4 2.2 0.4 15.6

108 84 70 58 62 10.4 11.3 17 10.4 3.6 61.9 11.5 10.7 1292.1 9.5 3.0 1.9 0.3 18.1 B: 0

146 103 90 67 71 12.1 12.8 14 12.1 4.2 69.7 9.9 9.3 198.6 7.8 3.5 1.7 0.3 18.4 S: 0

171 117 103 77 81 14.0 14.7 14 14.0 4.9 78.7 8.6 8.2 82.5 7.0 4.1 1.5 0.3 18.8 H: 0

ICB Industry : Industrials ICB Sector: Industrial Transportation Principal Business: Keppel T&T, besides its 20% stake in M1, is engaged in logistics and data center business. China and Singapore are the key growth markets for logistics and data center businesses respectively.

Source of all data: Company, DBS Vickers, Bloomberg

www.dbsvickers.com Refer to important disclosures at the end of this report ed: JS / sa: JC

Company Focus Keppel Telecommunications & Transportation

SWOT Analysis
Strengths Key player in data-centre business in Singapore. Singapore Governments initiative such as the New Generation National Broadband Network is helping to position Singapore as a data storage hub. The demand for data centre space is further fuelled by the growth in cloud computing services in Singapore. Entry barriers are high with upfront investment of S$20-50m and need of a track record, which KPTT gained by operating its data-centre in Ireland. Strong logistics player in Singapore and Asia. Logistics business continues to do well in Singapore, with growth coming from China and South-East Asia. Logistics contributed 36% of group profit in 2010 versus 17% from data-centre and 47% from investments (mainly M1). Healthy balance sheet and cash generation. KPTT generates close to S$50m of cash annually (over S$30m from M1 alone), out of which ~S$20m is paid out as dividends while rest is invested to grow logistics and data-centre businesses. The group enjoys a healthy balance sheet with net debt to equity below 50%. Weakness Number of investments in non-core business. KPTT has a number of investments in network engineering business. Many of these investments may not have high growth potential and could possibly be divested, in our view.

Opportunities Logistics business to grow in China and data-centre to expand in Singapore in 2011. The new Nanhai Distribution Centre (NHDC) in China with initial investment of S$25-30m will start operations in 2H11. KPTT also acquired the datacentre, Keppel DigiHub in Singapore in 1Q11, whose contribution is expected to grow. Newly set up fund to invest in global data-centre opportunities. KPTT are co-sponsors of the worlds first Shariah-compliant data centre fund, Securus Data Property Fund. With an initial closing of US$100m, Securus Fund is targeting to purchase a portfolio of high quality assets of Tier III or Tier IV status globally. KPTT intends to grow the size of the fund up to US$500m in the longer term. New management may rationalise past investments. Mr Pang Hee Hon was appointed CEO of Keppel T&T with effect from Jan 2010. The new management intends to divest noncore business going forward. This may result in more capital being redeployed into logistics and data-centres.

Threats Logistics growth may slip due to a global slowdown. The uncertain economies of the US and Europe suggest that global logistics volume growth may taper off in 2011. However, intra-Asia trade is expected to continue growing, aided by increasing consumption especially in China. As a matter of fact, KPTT was able to grow the earnings contribution from logistics in 2009 despite the global slowdown.

Source: DBS Vickers

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Company Focus Keppel Telecommunications & Transportation

Industry Trends - Data centre business


A data centre is a secure purpose-built facility that houses computer servers. The provision of high-quality data storage and management is critical for information dependent businesses, like telecom companies, IT service providers, financial institutions and government agencies that require their servers to have minimal or even zero disruptions. In order to ensure minimal downtime to these servers, data centres are built and operated to high technical standards in terms of cooling, power, water seepage prevention, fire prevention and security maintenance and are connected to land and/or submarine fibre-optic cables for high speed transmission of data. Data centres are classified into four tiers ranging from Tier I to Tier IV. The main difference between the various tiers lies in the amount of allowable downtime per year, with Tier IV data centres having the highest technical specifications and lowest threshold for downtime. Hence, Tier III and Tier IV data centres are selected to host mission-critical data computer systems. Global growth in Data Centres demand outstrips supply

Source: Tier 1 Research There are three segments in the data centre space. The key segments would be (1) asset ownership (2) collocation service (3) IT managed services. KPTT is involved in asset ownership and providing collocation services. KPTT leases data-centre space (not servers) to financial organisations and government agencies. KPTT currently owns and operate more than 260,000 square feet of gross floor area for data centre and business disaster recovery through their three Tier III plus data centres two in Singapore (Keppel Datahub and Keppel Digihub) and one in Ireland (Citadel 100). KPTT is a collocation service provider with c.10% market share in Singapore. The consulting firm BroadGroup projects Singapore's data centre capacity to grow from 2.4m sq ft this year to 3.6m sq ft in 2015, translating to 11% CAGR. Besides KPTT, major players in this space are SingTel, Equinix, T-Systems, Savvis and Tata Communications. Many of these players manage IT functions, which is different from KPTTs business model of providing collocation service only. Most of KPTTs customers (banks and government organisations) have their own IT personnel and are not willing to share their data. We estimate that KPTT commands an estimated 10% market share in terms of gross floor area occupied by data centres in Singapore. Dedicated fund for acquisition of data-centres. KPTT has also teamed up with AEP Capital, part of Saudi Arabiabased Al Rajhi Holding Group, to be co-sponsors of the worlds first Shariah-compliant data centre fund, Securus Fund. With an initial closing of US$100m, Securus Fund is targeting to purchase a portfolio of high quality assets of Tier III or Tier IV status globally (excluding US as there are enough funds there).

A typical data centre with space for multiple servers

Source Company, DBS Vickers

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Company Focus Keppel Telecommunications & Transportation

Various data centres under the group Companies Keppel DataHub, Tampines, Singapore Keppel Digihub, Serangoon, Singapore Citadel, Ireland Effective stake 70% 70% 50% Area Subsidiary/Asso (Sqm) ciate 5000 7333 5600 Subsidiary Subsidiary Associate

Source: Company, DBS Vickers

Industry Trends - Logistics business


Increasing trend of outsourcing to 3rd party logistic providers (3PLs). Continuous improvement in logistics infrastructure and efficient logistic practices have led 3PL services to be perceived as a far better way of controlling logistics processes. According to various sources, for example, the total market share of all 3PL providers in China is about 20%, much lower than the 57% in the US or the 80% in Japan. Multinational corporations are the prime users of these services. However, big domestic companies in leading industrial sectors have also started following the footsteps of their multinational counterparts in outsourcing their basic logistics functions. feeder service, warehousing and distribution, trucking service, supply chain solutions, third party logistics as well as other value-added services. FY11F earnings to benefit from a new distribution centre in China. Nanhai Distribution Centre (NHDC) will start operations in 2H11. With modern logistics features, NHDC will add 35,000 sm of warehousing space to KLFs footprint in the Pearl River Delta. First distribution centre in Northern China planned for 2013. Recently in Jan 11, KPTT signed an agreement with the Sino-Singapore Tianjin Eco-City Investment and Development Co Ltd (SSTEC) for the development and operation of a green integrated logistics distribution centre. The Tianjin Eco-City Integrated Logistics Distribution Centre (TECIDC) will be wholly owned and operated by Keppel T&T. It will have a total estimated investment amount of RMB 135m, and feature a 35,000sm modern warehouse space when completed. This will mark its first and significant step into North China. The rapid development of Tianjin is attracting a growing number of MNCs and international retailers to the Bohai region, which implies huge growth potential for logistics players like KPTT.

KPTT is an experienced 3PL. provider. KPTT has over 40 years of experience in offering integrated logistics solutions in Singapore with significant footprint across China, Hong Kong, Malaysia and Vietnam. KPTT serves many industries including fast moving consumer goods, biomedical, electronics and telecommunications. Key logistics clients are Nestle, Carrefour, Affymetrix, Trane, Brother and M1. In China, KPTT has built a significant presence through its subsidiary, Keppel Logistics (Foshan) Limited (KLF). KLF provides a wide range of solutions and services such as port operations, international freight forwarding, Non Vessel-Operating Common Carrier,

Various subsidiaries and associates in the logistics segment Companies Effective stake Keppel Logistics Pte Ltd 100% Keppel Logistics (Foshan) Ltd 70% Transware Distribution Services Pte Ltd 50% Asia Airfreight Terminal Company 10% Indo-Trans Keppel Logistics Vietnam 40%
Source: Company, DBS Vickers

Area (Sqm) 95,500 40,404 43,200 Not available 15200

Subsidiary Subsidiary Subsidiary Associate Associate

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Company Focus Keppel Telecommunications & Transportation

Company Background
Corporate History. Keppel T&T is a subsidiary of Keppel Corporation Ltd, a leading mainboard listed company in Singapore with core businesses in Offshore & Marine, Property and Infrastructure. Previously known as Steamers Maritime Holdings, the company repositioned for the telecommunications business by spearheading the Groups participation in M1 in 1997. Together with SPH and Axiata, it founded M1 as the second cellular operator in Singapore. The company has three key business segments: logistics, datacentre and investments. Investments mainly refer to KPTTs 19.74% stake in M1, besides other smaller investments. Former civil servant, Mr. Pang Hee Hon was appointed CEO while Keppel Corp veteran, Ms Chan Shui Har was appointed Deputy CEO & CFO in Jan 2010.

Sales Trend
S$ m S$ m

Profitability Trend
40.0%
98,309 88,309 78,309 68,309 58,309 48,309 38,309 28,309 18,309 8,309 2008A 2009A
Operating EBIT

160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2008A 2009A
Total Revenue

35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% 2010A 2011F 2012F

2010A
Pre tax Profit

2011F
Net Profit

2012F

Revenue Growth (%) (YoY)

Source: Company, DBS Vickers

Three key business segments Logistics & data centre contributed 36% & 17% of earnings respectively in 2010

3 rd p arty lo gistics

L o g istics

S u p ply c ha in so lu tio ns L o gistics infrastructu re

D ata cen tre

D ata centre
D ata centre fun d m gm t

In v estm en ts
Source: Company, DBS Vickers

M 1 & other sm all investm en ts

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Company Focus Keppel Telecommunications & Transportation

Key Management Team Name Current Appointment Mr.Teo Soon Hoe, (61, Non-Executive Aug 1988) Chairman Experience & Qualification Holds the concurrent posts of Senior Executive Director and the Group Finance Director of Keppel Corporation Limited. Also Chairman of M1 Limited and Keppel Philippines Holding. Bachelor of Business Administration, University of Singapore; Member of the Wharton Society of Fellows, University of Pennsylvania

Mr. Pang Hee Hon, (50, Jan 2010)

CEO

Appointed with effect from Jan 2010. Previously the Deputy President (Operations) of ST Electronics (InfoSoftware Systems), the Chairman of the eGov Chapter in the Singapore IT Federation. Head of Joint Logistics Department, MINDEF. Bachelor of Science and Bachelor of Commerce, University of Birmingham; Masters in Public Administration, Harvard University.

Ms. Chan Shui Har, (58, Jan 2010)

Deputy CEO and With Keppel Group for 22 years and was previously the CFO Deputy Chief Executive Officer of Evergro Properties Limited. General Manager of a listed real estate company. Bachelor of Accountancy Degree, University of Singapore; Diploma with distinction (Specialisation in Financial Management), Research Institute for Management Science in Delft, The Netherlands; Fellow of the Institute of Certified Public Accountants of Singapore.

Mr. Bruno Lopez, (46, CEO, Data Sep 1995) centre division

Prior to his joining the Keppel T&T Group, Mr Lopez worked in the Signal Corp of the Singapore Armed Forces and handled human resources for CWT Distribution Ltd. Bachelor of Arts (Honours), National University of Singapore; Masters in Human Resource Management, Rutgers University, USA.

Mr Gui Eng Hwee, (43, Sep 2007)

CEO, logistics division

Mr Gui has more than 15 years of work experience, most of which were in the supply chain and logistics fields. Prior to joining Keppel Logistics, Mr Gui was Vice President, Strategic development at Toll (Asia) Pte Ltd. He had also worked in managerial and consultative positions with MINDEF, GE Plastics SEA, and British American Tobacco. Bachelor of Science, National University of Singapore; Masters in Business Administration, National University of Singapore.

Source: Company, DBS Vickers

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Company Focus Keppel Telecommunications & Transportation

Competitive Strengths
Key player in data-centre business in Singapore. Singapore Governments initiative such as the New Generation National Broadband Network is helping to position Singapore as a data storage hub. The demand for data centre space is further fuelled by the growth in cloud computing services in Singapore. Entry barriers are high in the business with upfront investment of S$20-50m. Due to the nature of business with mission critical applications, track record is highly valued in the business, which KPTT gained by operating its data- centre in Ireland. Strong logistics player in Singapore and Asia. While logistics business continues to do well in Singapore, China and South-East Asian countries drive most of the growth. Logistics business contributed 36% of group profit in 2010 versus 17% from data-centre and 47% from investments (mainly M1). Healthy balance sheet and cash generation. KPTT generates close to S$50m of cash annually (over S$30m from M1 alone), out of which ~S$20m is paid out as dividends while rest is invested to grow logistics and data-centre businesses. The group enjoys a healthy balance sheet with net debt to equity below 50%. Newly set up fund to invest in global data-centre opportunities. KPTT would be co-sponsors of the worlds first Shariah-compliant data centre fund, Securus Data Property Fund. With an initial closing of US$100m, Securus Fund is targeting to purchase a portfolio of high quality assets of Tier III or Tier IV status globally. KPTT intends to grow the size of the fund to US$500m in the longer term. New management may rationalise past investments. Former civil servant, Mr. Pang Hee Hon was appointed CEO while Keppel Corp veteran, Ms Chan Shui Har was appointed Deputy CEO & CFO in Jan 2010. The new management intends to divest non-core businesses while investing in the core business. This may result in more capital being redeployed in logistics and data-centre businesses in our view.

Key Risks
Logistics business may be adversely impacted from global slowdown. The uncertain economies in the US and Europe suggest that global logistics volume growth may taper off in 2011. However, intra-Asia trade is expected to continue growing, aided by increasing consumption especially in China. KPTT was able to grow the earnings contribution of logistics business in 2009 despite the global slowdown. Dependence on overseas partners. Many of the overseas projects for logistics and data-centres are in collaboration with local partners. It also implies KPTT results are tied to the performance of these local partners as well. We have assumed that KPTT has done due diligence in selecting the local partners.

Growth Strategies
Grow logistics business in Asia and data-centre business in Singapore. The new Nanhai Distribution Centre (NHDC) in China with initial investment of S$25-30m will start operations in 2H11. This is part of groups strategy to capitalize on increasing trend of logistics outsourcing in China and other emerging markets. KPTT also acquired the datacentre Keppel DigiHub in Singapore in 1Q11, whose contribution is expected to grow. Besides, KPTT is planning its first logistics distribution centre in Northern China in 2013. KPTT may also exercise its expansion option in its Vietnamese logistics JV, following the lifting of foreign-investment restrictions

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Company Focus Keppel Telecommunications & Transportation

Segmental Analysis
Data-centre is the fastest growing business. Keppel Datahub, Tampines in Singapore started to contribute in 2H10, and achieved 100% occupancy in 2010 itself. KPTT is in the process of adding more capacity at DataHub already. Going forward, the addition of Keppel Digihub, Serangoon in 1Q11 should be reflected in 2011 revenue. In the past, associate earnings contribution from data-centre in Ireland was the only driver. Going forward, KPTT could increase its share of associate earnings by investing in data-centre opportunities globally. Logistic segment may continue to grow. In 2010, the growth in Logistics Division was largely due to stronger contributions from Keppel Logistics (Foshan) China and Segmental Analysis
FY Dec 2009A 2010A 2011F 2012F

stronger contribution from associate company, Asia Airfreight Terminal in Hong Kong. 2011 growth should be driven by NanHai Distribution Centre, which is expected to start contributing in 2H11. Investment segment reports stable to mild growth in earnings. A 19.74% stake in M1 is the key contributor here. M1s earnings should benefit from National Broadband Network in Singapore, which has opened up a new revenue stream for M1. This segment is the main source of cash generation for KPTT, as M1 pays 80-100% of its earnings in the form of dividends to its shareholders.

Revenues (S$ m) Logistics Data centre Investments Others Total Net Profit (S$ m) Logistics Data centre Investments Others Total Margins (%) Logistics Data centre Investments Others Total

96 0 22 (4) 113 18 5 22 45 19.0% nm 100.1% nm 0.0% 39.4%

90 7 15 (4) 108 21 10 27 58 23.1% 149.5% 204.8% nm 0.0% 53.7%

103 34 12 (4) 146 24 15 29 67 23.0% 44.0% 271.7% nm 0.0% 45.8%

116 48 11 (4) 171 27 21 30 77 22.9% 43.7% 313.7% nm 0.0% 45.0% Most of the investment profit comes from its 20% stake in M1 Sharp rise due to new contribution from Keppel DigiHub and higher contribution from Keppel DataHub

Source: Company, DBS Vickers

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Company Focus Keppel Telecommunications & Transportation

Income Statement (S$ m)


FY Dec 2008A 2009A 2010A 2011F 2012F

Margins Trend
56.0% 46.0% 36.0% 26.0% 16.0% 6.0% 2008A 2009A 2010A 2011F 2012F
Operating Margin % Net Income Margin %

Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)

129 (50) 79 (68) 11 0 56 (1) (3) 63 (12) (3) 0 48 51 74 N/A N/A N/A N/A 61.4 8.4 37.0 17.2 8.7 1.8 60.0 17.4

113 (40) 74 (65) 8 0 59 (2) (9) 57 (9) (3) 0 45 53 73 (12.0) (0.6) (23.6) (6.6) 64.9 7.3 39.3 15.6 8.0 1.4 35.0 5.3

108 (31) 77 (64) 12 0 64 (2) (5) 70 (10) (3) 0 58 62 84 (4.9) 15.0 49.2 29.3 71.3 11.5 53.4 18.1 10.0 2.0 35.0 7.2

146 (42) 104 (80) 24 0 72 (2) (4) 90 (19) (4) 0 67 71 103 35.2 23.1 91.6 16.4 71.3 16.3 46.0 18.4 11.0 3.3 35.0 13.8

171 (49) 122 (91) 30 0 78 (2) (4) 103 (21) (5) 0 77 81 117 17.1 13.1 26.9 15.4 71.3 17.7 45.3 18.8 11.6 3.9 35.0 17.5

Net profit can be much higher if KPTT is able to acquire new data centers outside Singapore

Source: Company, DBS Vickers

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Company Focus Keppel Telecommunications & Transportation


Balance Sheet (S$ m)
FY Dec 2008A 2009A 2010A 2011F 2012F

Asset Breakdown 127 285 15 53 4 63 1 546 53 52 134 1 277 29 546 15 (134) 178.0 430.1 31.3 0.2 1.1 1.1 0.4 0.5 4.5 147 303 10 71 2 39 1 573 58 44 148 1 296 26 573 (2) (135) 163.9 511.8 32.7 0.2 1.1 1.1 0.4 0.5 14.4 154 329 5 61 2 30 0 582 23 42 147 2 342 27 582 (9) (108) 117.2 642.7 35.5 0.2 1.5 1.4 0.3 0.3 8.6 181 367 9 55 3 24 0 639 23 51 147 2 385 31 639 (24) (115) 67.8 438.7 28.4 0.2 1.1 1.1 0.3 0.3 20.6 202 409 7 46 3 28 0 696 23 53 147 2 436 36 696 (22) (124) 55.6 402.2 29.2 0.3 1.0 1.0 0.3 0.3 17.7 Gearing may remain stable due to the need to invest in new data centers and logistics facilities
Associates'/JV s 57.1% Bank, Cash and Liquid Assets 10.7% Inventory 0.4%

Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholders Equity Minority Interests Total Cap. & Liab. Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%)

Debtors 5.2% Net Fixed Assets 26.6%

Source: Company, DBS Vickers

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Company Focus Keppel Telecommunications & Transportation


Cash Flow Statement (S$ m)
FY Dec 2008A 2009A 2010A 2011F 2012F
40

Capital Expenditure

Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (S cts) Free CFPS (S cts)

63 7 0 (56) 0 9 22 (8) (8) (8) 28 1 5 (43) (9) 2 2 (48) 0 (21) 4.0 2.5

57 6 (2) (59) 0 23 26 (30) (30) (3) 28 (1) (35) (20) 19 0 (2) (3) 0 (12) 4.7 (0.7)

70 7 3 (64) 0 4 19 (15) (15) (2) 33 3 5 (17) (35) 0 6 (47) 0 (22) 3.5 0.9

90 8 (19) (72) 6 0 14 (35) 0 0 34 1 0 (20) 0 0 0 (20) 0 (7) 1.3 (3.9)

102 9 (21) (78) 2 0 15 (30) 0 0 35 (5) 0 (23) 0 0 0 (23) 0 (9) 2.3 (2.8)

35 30 25 20 15 10 5 0 2008A 2009A 2010A 2011F 2012F

Capital Expenditure (-)

Almost all of the retained earnings need to be invested in new data centers and logistics facilities. Dividend payout ratio is c.35%

Source: Company, DBS Vickers

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Company Focus Keppel Telecommunications & Transportation


Quarterly / Interim Income Statement (S$ m)
FY Dec 4Q2009 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011

Margins Trend
80% 70%

Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)

25 (7) 16 (13) 3 0 18 0 0 20 (3) (1) 17 17 22

25 (7) 18 (16) 2 0 15 (1) 0 17 (3) (1) 13 13 21

27 (8) 19 (17) 2 0 16 0 0 18 (4) (1) 14 14 20

28 (9) 19 (16) 3 0 17 0 0 20 (4) (1) 16 15 22

27 (7) 20 (15) 5 0 16 0 0 20 1 (1) 20 20 22

30 (7) 23 (19) 4 0 15 (1) 0 19 (3) 0 15 15 22

60% 50% 40% 30% 20% 10% 0% 1Q2009 2Q2009 3Q2009 4Q2009 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011 2Q2011

Operating Margin %

Net Income Margin %

YoY improvement driven by higher contribution from data centre operations, which should accelerate further

(16.7) 19.0 4.1 31.6 63.3 11.6 69.3

3.1 (3.5) (26.8) (25.9) 70.6 8.2 49.8

6.9 (5.1) 12.6 8.9 71.0 8.7 50.7

3.6 7.5 31.5 13.8 68.5 11.0 55.7

(4.4) 2.1 56.1 29.9 75.1 18.0 75.8

12.3 (1.0) (10.5) (24.4) 76.0 14.3 51.0

Source: Company, DBS Vickers

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Company Focus Keppel Telecommunications & Transportation

Valuation
Data-centre business is the most exciting as US players trade at 50x PER. There are no listed players in Singapore with significant exposure to data centre business. Some of the bigger US players such as Digital Realty Trust, Equinix and Dupont Fabros Fund are global leaders in the datacentre space and trade at 30-50x FY11F PER given their high growth potential. This business contributed 17% of KPTTs earnings in FY10 and is expected to contribute a higher 26% in FY11F. We expect data-centre of KPTT to post FY10-12F earnings CAGR of 44%. Our growth estimates are quite conservative with upside potential if KPTT is successful in acquiring and growing data-centre business globally. Logistics business is attractive for its growth prospects outside Singapore. Singapore listed logistic players like CWT and Poh Tiong Choon Logistics trade at 16x and 8x FY11F PE respectively. KPTT is a larger logistics player than Poh Tiong Sum of the parts valuation for Keppel T&T Business M1 Core business of logistics & data centre KPTT's SOP price
Source: DBS Vickers

Choon and is part of the much bigger Keppel group with a significant footprint in China. Logistics business contributed 36% of KPTTs earnings in FY10 and is expected to contribute 35% in FY11F. We expect logistics business to record FY10-12F earnings CAGR of 12%. Excluding M1, KPTT is trading at only 6x FY11F PE despite offering 24% FY10-12F earnings CAGR. The combined logistics and data-centre businesses contributed 53% of earnings in FY10, which should grow to 58% in FY11F. Given that KPTTs stake in M1 is worth S$0.81 Scents at the current market price of M1, the remaining business is trading at only 6 FY1F PE. We advocate at least 12x PE for this business given (i) 24% earnings CAGR in FY10-12F; and (ii) high PE valuation of ~40-50x enjoyed by leading data centre players.

KPTT stake 20% 100%

FY11F earnings contribution (S$m) 33.0 38.7

Valuation Methodology Market price of M1 at S$2.50 per share 12x FY11F PER

Value of Stake at the market price (S$m) 447 464

Contribution per share 0.81 0.84 1.65

Peer valuations
----------- FY11 ------------Net profit EPS growth growth % % --------- FY10-12 CAGR ----------Net Revenue profit growth growth % %

Segments/ Companies

Share Code price Mkt Cap LCY LCY $m

Fiscal Yr

Revenue growth %

EPS growth %

FY11 FY11 FY11 ROE Yield PB % % x

FY11 FY11 PE PEG x x

Data centre
Digital Realty Trust Equinix Inc DuPont Fabros Tech DLR US EQIX US DFT US CWT SP PTC SP 61.83 96.49 24.39 1.22 0.4 5,884 4,520 1,487 720 86 Dec Dec Dec Dec Dec 20.0 26.2 20.3 12.3 n.a. 24.6 166.2 68.2 (76.8) n.a. 79.0 155.0 45.1 (76.3) n.a. 16.7 20.2 21.2 10.8 n.a. 28.5 105.0 51.1 (47.8) n.a. 51.1 93.5 41.4 (46.8) n.a. 6.4 6.1 5.0 9.6 n.a. 4.4 0.0 2.0 2.5 n.a. 2.4 2.2 1.3 1.5 n.a.

50.1 45.0 33.0 16.9 n.a.

1.8 1.0 0.9 0.9 n.a.

Logistics
CWT Ltd Poh Tiong Choon Lo

Source: Bloomberg

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Company Focus Keppel Telecommunications & Transportation

DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends


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Company Focus Keppel Telecommunications & Transportation

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