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Keppel Telecommunications & Transportation Sees Profit Decline By 5.3% – Are Better Days Ahead?

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Just yesterday, Keppel Telecommunications & Transportation (SGX: K11) released its financial results for the first half of 2014. The company is one of the many listed subsidiaries of the conglomerate Keppel Corporation (SGX: BN4).

Despite Keppel T&T having its main business activities in the logistics and data centre space, it’s interesting to note that most of its profit is derived from its investment in M1 (SGX: B2F), the third largest telecommunications provider in Singapore.

Revenue on a roll

Keppel T&T saw huge growth in revenue; the company’s top-line grew 24.3% year-on-year to S$100 million for the first half of 2014. Unfortunately, due to its rising costs, the company’s operating profit only improved by 7.6% to S$16.7 million compared to a year ago. Most of the increase in expenses came from higher cost of goods sold, staff costs, and larger depreciation. Higher interest expenses – a 51.8% increase to S$5.5 million – also pinched the company’s operating profit as long-term and short-term debt had increased since the end of 2013.

So, with all those higher expenses, Keppel T&T’s profit actually came in at S$29.7 million, some 5.3% lower compared to a year ago.

From the company’s segmental reporting, its investments segment contributed about S$14 million to its net profit, which is almost half of its overall profit. According to Keppel T&T’s past annual reports, an overwhelming majority of profit from the segment comes from M1.

On the balance sheet front, things are not improving for the company; its net debt to equity ratio is now 80.3% which is an increase from 77.0% seen at the end of last year.

Future plans

Keppel T&T is expanding fast in its logistics business; it has started the construction of new logistics parks in China, Singapore, and Vietnam. Furthermore, the company is currently planning to spin-off its data centre operations into a real estate investment trust. The process is on-going and the company’s waiting for regulatory approvals. If the spin-off is successful, it might help raise capital for the company to pare down some of its debt and give some breathing space in its balance sheet for new expansion plans in the future.

Foolish Summary

The nature of Keppel T&T’s business is such that logistics and data centres are asset-based businesses that require a long gestation period before any strong returns can be seen. For now, the contribution from M1 is a blessing for the company as it provides cash flow and profits for further expansion.

 

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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 contributor Stanley Lim owns shares in Keppel Corp.