DBS issued a “Buy” on KT&T last week when it traded at S$1.32. The interesting fact is that the stock is trading at a 35% discount to DBS’ sum-of-the-parts-based target price of S$1.65. Too bad yield is only 2.65%.
The Next Generation National Broadband Network and growth in cloud computing are fuelling demand for data-centre space in Singapore. Keppel Telecommunications & Transportation (Keppel T&T) is the only listed player in Singapore with significant exposure to data-centre business and is among the top five players in Singapore.
Besides, Keppel T&T is positioned to benefit from the increasing trend of logistics outsourcing to third-party players in China and South-east Asia. The recently acquired Keppel DigiHub data centre in Singapore and the newly built Nanhai Distribution Centre in China are the key growth drivers for 2011.
Keppel T&T has set up a dedicated fund (initial closing of US$100 million) to invest in Syariah-compliant data centres globally in an alliance with Saudi Arabia-based Al Rajhi Holding Group. Ever since the appointment of new management in January 2010, Keppel T&T is focusing on growing its data centre and logistics business with less emphasis on the legacy business of network engineering.
Core business is deeply undervalued. Excluding M1, Keppel T&T’s core business is trading at only 6x estimated 2011 full-year earnings, based on our conservative estimates. Global data centre players such as Equinix and Digital Realty Trust trade at 40-50x earnings, reflecting higher growth in the sector. Initiate with ‘buy’ for 35 per cent upside potential to our sum-of-the-parts-based TP of S$1.65.