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Where to Next for the Steady Dividend-Payer Keppel Telecom & Transport Ltd – Part 2

Welcome to the second part of the article on Keppel Telecom. & Transport. Ltd. (SGX: K11). In my previous article, I covered the sources of revenue for Keppel T&T. In here, I’d look at the profit and balance sheet for the company.

As a recap: The company’s shares are up 85% from 1 Jan 2009 to its closing price on 23 December 2014. In comparison, the capital gains of the SPDR STI ETF (SGX: ES3) was 80% for the same duration. The SPDR STI ETF is a proxy for Singapore’s market benchmark, Straits Times Index (SGX: ^STI).

Keppel T&T is a subsidiary of marine engineering, property development, and infrastructure conglomerate Keppel Corporation Limited (SGX: BN4) – the latter owns close to 80% of the former. Over the past five years between 2009 and 2013, Keppel T&T has distributed a steady annual dividend totaling 17 cents per share.

Year Dividend per share (Singapore cents)
2009 3.0
2010 3.5
2011 3.5
2012 3.5
2013 3.5

Source: S&P Capital IQ

There are two major divisions within Keppel T&T, the Logistics Division and the Data Centre Division. The Logistics division provides various logistics services including integrated port operations, supply chain solutions, warehousing and distribution, and freight forwarding services.

Meanwhile, the Data Centre Division provides data centre co-location services. There is also the Investments Division which is the investment holding arm of Keppel T&T for various entities not within the first two divisions.

A closer look

Keppel T&T - 1

Source: Company Earnings Report

The financial year for Keppel T&T coincides with the calendar year. For the five years from 2009 to 2013, the firm has managed to grow its bottom line at an annualized compounded rate of 7.9%. This is marginally faster than its annual revenue growth rate of 7.4% during the same timeframe.

The main contributor to profit growth, just like for revenue growth, is once again the data centre business segment which grew its bottom-line by more than four times in five years. At the other end of the spectrum, profits from the logistics business segment has been lackluster in the past two years due to start-up and implementation costs for new projects in China.

For the investments segment, profits there originates from contributions from Keppel T&T’s associated companies and other income. Keppel T&T counts Singapore’s third-largest telco M1 Ltd (SGX: B2F) – the former owns a 20% stake in the latter – as one of its many associated companies.

Keppel T&T - 2

Source: Company Earnings Report

Due to heavy capital expenditures – especially between 2011 and 2013 – Keppel T&T was free cash flow negative for four out of the past five years. Operating cash flow has also been rather flat for most of the duration, though it did increase by 50% in 2013 when compared to 2012. The ability of Keppel T&T to generate free cash flow in the future is something investors should keep their eyes peeled on – ideally, the company should show further improvement in this area.

Keppel T&T - 3

Source: Company Earnings Report

The effects of the negative free cash flow generated by Keppel T&T from 2011 to 2013 has showed up in the balance sheet as an increase in borrowings during the same period. Moving forward, we have to observe if the company is able to generate free cash flow and keep its borrowings in check. Keppel T&T ended 2013 with a sizable $487 million in borrowings while carrying only about S$80 million in cash and equivalents.

Foolish summary

Being in the warehousing and logistics space, Keppel T&T has relatively stable revenue streams for its business. But moving forward, cautious Foolish investors might want to look for signs of improvements in operating cash flow as well as a reduction in borrowings before committing money to its shares.

Recently, Keppel T&T decided to raise funds by spinning off its much of its data centre business segment into Keppel DC Reit (SGX: AJBU). You can read more about the initial public offering for Keppel DC Reit here.

As of its closing price on 23 December 2014 of $1.50, Keppel T&T traded at a trailing earnings ratio of about 12.6, and has a dividend yield of around 2.3%.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.