Are There Hidden Assets within This Company?

Keppel Telecommunications & Transportation (SGX: K11) is part of the logistics arm of conglomerate Keppel Corporation’s (SGX: BN4) Infrastructure business segment. And, there are two segments to Keppel T&T’s main operating businesses: 1) Logistics; and 2) Data Centres.

Under the first segment, Keppel T&T provides logistics solutions with “world-class facilities” and “state-of-the-art IT infrastructure” in countries like Singapore, China, Malaysia, Vietnam, and Indonesia. As for the data centre side of things, Keppel T&T is active in Singapore, Europe, Australia, and Malaysia and provides data centre co-location (where equipment, space, and bandwidth within data centres are rented out to retail customers) and business contingency services.

But while logistics and data centre services can be considered Keppel T&T’s bread-and-butter, they are not actually the most important moving cogs in the company’s profit picture when considered individually.

For the whole of 2013, the Logistics segment provided S$16 million in net profit for Keppel T&T while the Data Centre segment raked in S$16.6 million. That works out to a weighting of 26% each for Keppel T&T’s overall net profit of S$63.2 million; the other 48% (some S$30.5 million) actually comes from the share of profits from Keppel T&T’s ‘Investments’ division where it holds stakes in other operating companies. Within the ‘Investments’ division, the bulk of its profits actually stem from Keppel T&T’s 19.4% ownership in telecommunications operator M1 (SGX: B2F). In 2013, M1 made S$160 million in profits and thus Keppel T&T’s share of that works out to be S$31.1 million.

From the figures above, we can see M1’s overwhelming importance to Keppel T&T’s overall profitability. But as it turns out, Keppel T&T’s stake in M1 might even be a possible hidden asset.

Based on Keppel T&T’s latest financials, as of 31 March 2014, it had a book value (total assets minus total liabilities) of some S$569 million, or S$0.88 per share. What’s interesting here is that the company’s investments in publicly-listed companies are held at cost on its balance sheet. There’s no such breakdown for Keppel T&T’s financials for the first quarter of 2014, but as of 31 Dec 2013, the company’s investments in publicly-listed shares were carried at cost of S$126 million when they actually had a market value of S$601 million. The overwhelming majority of the S$601 million in turn came from Keppel T&T’s 19.4% stake in M1 given the latter’s market capitalisation of S$3.02 billion at that time (a 19.4% stake in M1 would be worth S$586 million).

Assuming nothing else has changed in Keppel T&T’s balance sheet and using M1’s current market capitalisation of S$3.098 billion, it would give Keppel T&T an adjusted book value of S$1.059 billion, or S$1.638 per share, currently.

Reported book value as of 31 March 2014

Current market value of investments minus value-at-cost

Adjusted Book Value

S$569 million

S$490 million

S$1.059 billion

Source: Keppel T&T’s 2013 Annual Report and Earnings Release for first quarter of 2014

At its current share price of S$1.79, Keppel T&T’s valued at only 1.1 times its adjusted book value. When companies get valued by the market at close to the value of its assets, it’s an implicit assumption that the market thinks the company’s assets can’t be used to generate high returns. So now, here’s the million dollar question: Are Keppel T&T’s assets able to generate good returns, or is the market right in valuing the company at close to its adjusted book value?

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.