2011 Jun 24 - DBS - Keppel T&T

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

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 [email protected]

Price Relative

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Relative Index

Keppel Telecom m unications & Transportation (LHS) Relative STI INDEX (RHS)

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

Turnover 113 108 146 171 EBITDA 73 84 103 117 Pre-tax Profit 57 70 90 103 Net Profit 45 58 67 77 Net Pft (Pre Ex.) 53 62 71 81 EPS (S cts) 8.1 10.4 12.1 14.0 EPS Pre Ex. (S cts) 9.6 11.3 12.8 14.7 EPS Gth Pre Ex (%) 4 17 14 14 Diluted EPS (S cts) 8.1 10.4 12.1 14.0 Net DPS (S cts) 2.8 3.6 4.2 4.9 BV Per Share (S cts) 53.6 61.9 69.7 78.7 PE (X) 14.9 11.5 9.9 8.6 PE Pre Ex. (X) 12.5 10.7 9.3 8.2 P/Cash Flow (X) nm 1292.1 198.6 82.5 EV/EBITDA (X) 11.3 9.5 7.8 7.0 Net Div Yield (%) 2.4 3.0 3.5 4.1 P/Book Value (X) 2.2 1.9 1.7 1.5 Net Debt/Equity (X) 0.4 0.3 0.3 0.3 ROAE (%) 15.6 18.1 18.4 18.8 Consensus EPS (S cts): - - Other Broker Recs: B: 0 S: 0 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

At A Glance Issued Capital (m shrs) 553 Mkt. Cap (S$m/US$m) 663 / 537 Major Shareholders Keppel Corp Ltd (%) 80.1 Kapital Asia Pte Ltd (%) 5.3 Free Float (%) 14.6 Avg. Daily Vol.(‘000) 67

DBS Group Research . Equity 24 Jun 2011

Singapore Company Focus

Keppel Telecommunications & Transportation Bloomberg: KPTT SP | Reuters: KTEL.SI

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 data-centre 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.

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 data-centre 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 data-centre & 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.

Company Focus

Keppel Telecommunications & Transportation

SWOT Analysis

Strengths Weakness

• Key player in data-centre business in Singapore. Singapore Government’s 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%.

• 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 Threats • 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 data-centre, 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 world’s 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 non-core business going forward. This may result in more capital being redeployed into logistics and data-centres.

• 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

Company Focus


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.

A typical data centre with space for multiple servers

Source” Company, DBS Vickers

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 KPTT’s business model of providing collocation service only. Most of KPTT’s 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 Arabia-based Al Rajhi Holding Group, to be co-sponsors of the world’s 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).

Company Focus


Various data centres under the group

Companies Effective

stakeArea

(Sqm)Subsidiary/Asso

ciate

Keppel DataHub, Tampines, Singapore 70% 5000 Subsidiary

Keppel Digihub, Serangoon, Singapore 70% 7333 Subsidiary

Citadel, Ireland 50% 5600 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.

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,

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 KLF’s 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.

Various subsidiaries and associates in the logistics segment Companies Effective stake Area (Sqm) Keppel Logistics Pte Ltd 100% 95,500 Subsidiary Keppel Logistics (Foshan) Ltd 70% 40,404 Subsidiary Transware Distribution Services Pte Ltd 50% 43,200 Subsidiary Asia Airfreight Terminal Company 10% Not available Associate Indo-Trans Keppel Logistics Vietnam 40% 15200 Associate Source: Company, DBS Vickers

Company Focus


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 Group’s 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, data-centre and investments. Investments mainly refer to KPTT’s 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 Profitability Trend

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S$ m

Operating EBIT Pre tax Profit Net Profit

Source: Company, DBS Vickers Three key business segments – Logistics & data centre contributed 36% & 17% of earnings respectively in 2010


L ogistics

Investm ents

3rd party logistics

Supply chain solutions

Logistics infrastructure

D ata centreD ata centre fund m gm t

M 1 & other sm all investm ents

D ata centre

L ogistics

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3rd party logistics

Supply chain solutions

Logistics infrastructure

D ata centreD ata centre fund m gm t

M 1 & other sm all investm ents

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Company Focus


Key Management Team Name Current

Appointment Experience & Qualification

Mr.Teo Soon Hoe, (61, Aug 1988)

Non-Executive Chairman

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 (Info-Software 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 CFO

With Keppel Group for 22 years and was previously the 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, Sep 1995)

CEO, Data 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.


Company Focus


Competitive Strengths • Key player in data-centre business in Singapore. Singapore Government’s 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%.

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 group’s strategy to capitalize on increasing trend of logistics outsourcing in China and other emerging markets. KPTT also acquired the data-centre 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

• Newly set up fund to invest in global data-centre opportunities. KPTT would be co-sponsors of the world’s 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.

Company Focus


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

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. M1’s 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.

Segmental Analysis

FY Dec 2009A 2010A 2011F 2012F

Revenues (S$ m) Logistics 96 90 103 116 Data centre 0 7 34 48 Investments 22 15 12 11 Others (4) (4) (4) (4) Total 113 108 146 171 Net Profit (S$ m) Logistics 18 21 24 27 Data centre 5 10 15 21 Investments 22 27 29 30 Others Total 45 58 67 77 Margins (%) Logistics 19.0% 23.1% 23.0% 22.9% Data centre nm 149.5% 44.0% 43.7% Investments 100.1% 204.8% 271.7% 313.7% nm nm nm nm Others 0.0% 0.0% 0.0% 0.0% Total 39.4% 53.7% 45.8% 45.0%


Sharp rise due to new contribution from “Keppel DigiHub” and higher contribution from “Keppel DataHub”

Most of the investment profit comes from its 20% stake in M1

Company Focus


Income Statement (S$ m) FY Dec 2008A 2009A 2010A 2011F 2012F

Revenue 129 113 108 146 171

Cost of Goods Sold (50) (40) (31) (42) (49)

Gross Profit 79 74 77 104 122

Other Opng (Exp)/Inc (68) (65) (64) (80) (91)

Operating Profit 11 8 12 24 30

Other Non Opg (Exp)/Inc 0 0 0 0 0

Associates & JV Inc 56 59 64 72 78

Net Interest (Exp)/Inc (1) (2) (2) (2) (2)

Exceptional Gain/(Loss) (3) (9) (5) (4) (4)

Pre-tax Profit 63 57 70 90 103

Tax (12) (9) (10) (19) (21)

Minority Interest (3) (3) (3) (4) (5)

Preference Dividend 0 0 0 0 0

Net Profit 48 45 58 67 77

Net Profit before Except. 51 53 62 71 81

EBITDA 74 73 84 103 117

Growth

Revenue Gth (%) N/A (12.0) (4.9) 35.2 17.1

EBITDA Gth (%) N/A (0.6) 15.0 23.1 13.1

Opg Profit Gth (%) N/A (23.6) 49.2 91.6 26.9

Net Profit Gth (%) N/A (6.6) 29.3 16.4 15.4

Margins & Ratio

Gross Margins (%) 61.4 64.9 71.3 71.3 71.3

Opg Profit Margin (%) 8.4 7.3 11.5 16.3 17.7

Net Profit Margin (%) 37.0 39.3 53.4 46.0 45.3

ROAE (%) 17.2 15.6 18.1 18.4 18.8

ROA (%) 8.7 8.0 10.0 11.0 11.6

ROCE (%) 1.8 1.4 2.0 3.3 3.9

Div Payout Ratio (%) 60.0 35.0 35.0 35.0 35.0

Net Interest Cover (x) 17.4 5.3 7.2 13.8 17.5 Source: Company, DBS Vickers

Margins Trend

6.0%

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Operating Margin % Net Income Margin %

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

Company Focus


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

Net Fixed Assets 127 147 154 181 202

Invts in Associates & JVs 285 303 329 367 409

Other LT Assets 15 10 5 9 7

Cash & ST Invts 53 71 61 55 46

Inventory 4 2 2 3 3

Debtors 63 39 30 24 28

Other Current Assets 1 1 0 0 0

Total Assets 546 573 582 639 696

ST Debt

53 58 23 23 23

Other Current Liab 52 44 42 51 53

LT Debt 134 148 147 147 147

Other LT Liabilities 1 1 2 2 2

Shareholder’s Equity 277 296 342 385 436

Minority Interests 29 26 27 31 36

Total Cap. & Liab. 546 573 582 639 696

Non-Cash Wkg. Capital 15 (2) (9) (24) (22)

Net Cash/(Debt) (134) (135) (108) (115) (124)

Debtors Turn (avg days) 178.0 163.9 117.2 67.8 55.6

Creditors Turn (avg days) 430.1 511.8 642.7 438.7 402.2

Inventory Turn (avg days) 31.3 32.7 35.5 28.4 29.2

Asset Turnover (x) 0.2 0.2 0.2 0.2 0.3

Current Ratio (x) 1.1 1.1 1.5 1.1 1.0

Quick Ratio (x) 1.1 1.1 1.4 1.1 1.0

Net Debt/Equity (X) 0.4 0.4 0.3 0.3 0.3

Net Debt/Equity ex MI (X) 0.5 0.5 0.3 0.3 0.3

Capex to Debt (%) 4.5 14.4 8.6 20.6 17.7 Source: Company, DBS Vickers

Asset Breakdown

Net Fixed Assets - 26.6%

Associates'/JVs 57.1%

Bank, Cash and Liquid

Assets - 10.7%

Inventory - 0.4%

Debtors - 5.2%

Gearing may remain stable due to the need to invest in new data centers and logistics facilities

Company Focus


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

Pre-Tax Profit 63 57 70 90 102

Dep. & Amort. 7 6 7 8 9

Tax Paid 0 (2) 3 (19) (21)

Assoc. & JV Inc/(loss) (56) (59) (64) (72) (78)

Chg in Wkg.Cap. 0 0 0 6 2

Other Operating CF 9 23 4 0 0

Net Operating CF 22 26 19 14 15

Capital Exp.(net) (8) (30) (15) (35) (30)

Other Invts.(net) (8) (30) (15) 0 0

Invts in Assoc. & JV (8) (3) (2) 0 0

Div from Assoc & JV 28 28 33 34 35

Other Investing CF 1 (1) 3 1 (5)

Net Investing CF 5 (35) 5 0 0

Div Paid (43) (20) (17) (20) (23)

Chg in Gross Debt (9) 19 (35) 0 0

Capital Issues 2 0 0 0 0

Other Financing CF 2 (2) 6 0 0

Net Financing CF (48) (3) (47) (20) (23)

Currency Adjustments 0 0 0 0 0

Chg in Cash (21) (12) (22) (7) (9)

Opg CFPS (S cts) 4.0 4.7 3.5 1.3 2.3

Free CFPS (S cts) 2.5 (0.7) 0.9 (3.9) (2.8) Source: Company, DBS Vickers

Capital Expenditure

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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%

Company Focus


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

Revenue 25 25 27 28 27 30

Cost of Goods Sold (7) (7) (8) (9) (7) (7)

Gross Profit 16 18 19 19 20 23

Other Oper. (Exp)/Inc (13) (16) (17) (16) (15) (19)

Operating Profit 3 2 2 3 5 4

Other Non Opg (Exp)/Inc 0 0 0 0 0 0

Associates & JV Inc 18 15 16 17 16 15

Net Interest (Exp)/Inc 0 (1) 0 0 0 (1)

Exceptional Gain/(Loss) 0 0 0 0 0 0

Pre-tax Profit 20 17 18 20 20 19

Tax (3) (3) (4) (4) 1 (3)

Minority Interest (1) (1) (1) (1) (1) 0

Net Profit 17 13 14 16 20 15

Net profit bef Except. 17 13 14 15 20 15

EBITDA 22 21 20 22 22 22

Growth

Revenue Gth (%) (16.7) 3.1 6.9 3.6 (4.4) 12.3

EBITDA Gth (%) 19.0 (3.5) (5.1) 7.5 2.1 (1.0)

Opg Profit Gth (%) 4.1 (26.8) 12.6 31.5 56.1 (10.5)

Net Profit Gth (%) 31.6 (25.9) 8.9 13.8 29.9 (24.4)

Margins

Gross Margins (%) 63.3 70.6 71.0 68.5 75.1 76.0

Opg Profit Margins (%) 11.6 8.2 8.7 11.0 18.0 14.3

Net Profit Margins (%) 69.3 49.8 50.7 55.7 75.8 51.0

Margins Trend

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Operating Margin % Net Income Margin %


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

Company Focus


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 data-centre space and trade at 30-50x FY11F PER given their high growth potential. This business contributed 17% of KPTT’s 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

Choon and is part of the much bigger Keppel group with a significant footprint in China. Logistics business contributed 36% of KPTT’s 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 KPTT’s 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.

Sum of the parts valuation for Keppel T&T

Business KPTT stake FY11F earnings contribution (S$m)

Valuation Methodology

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

Contribution per share

M1 20% 33.0 Market price of M1 at S$2.50 per share 447 0.81

Core business of logistics & data centre

100% 38.7 12x FY11F PER 464 0.84

KPTT's SOP price 1.65 Source: DBS Vickers

Peer valuations Source: Bloomberg

CodeShare price Mkt Cap

Fiscal Yr

Revenue growth

Net profit

growthEPS

growthRevenue growth

Net profit

growthEPS

growthFY11 ROE

FY11 Yield

FY11 PB

FY11 PE

FY11 PEG

LCY LCY $m % % % % % % % % x x x

Data centreDigital Realty Trust DLR US 61.83 5,884 Dec 20.0 24.6 79.0 16.7 28.5 51.1 6.4 4.4 2.4 50.1 1.8

Equinix Inc EQIX US 96.49 4,520 Dec 26.2 166.2 155.0 20.2 105.0 93.5 6.1 0.0 2.2 45.0 1.0

DuPont Fabros Tech DFT US 24.39 1,487 Dec 20.3 68.2 45.1 21.2 51.1 41.4 5.0 2.0 1.3 33.0 0.9

LogisticsCWT Ltd CWT SP 1.22 720 Dec 12.3 (76.8) (76.3) 10.8 (47.8) (46.8) 9.6 2.5 1.5 16.9 0.9

Poh Tiong Choon Lo PTC SP 0.4 86 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Segments/Companies

----------- FY11 ------------- --------- FY10-12 CAGR -----------

Company Focus


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Company Focus


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2011 Jun 24 - DBS - Keppel T&T

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