Keppel DC REIT - DBS Research 2016-11-29: Destiny in its own hands

Keppel DC REIT - DBS Vickers 2016-11-29: Destiny in its own hands KEPPEL DC REIT AJBU.SI

Keppel DC REIT - Destiny in its own hands

  • Accretive acquisition of KDC SG 3 to drive 5% CAGR in distributions.
  • Strong balance sheet to fund growth ambitions.
  • BUY with revised TP of S$1.33.



BUY with S$1.33 TP. 

  • Keppel DC REIT (KDC REIT) remains one of the few REITs in Singapore that is projected to deliver a solid 5% CAGR in distributions supported by positive market dynamics.
  • Low gearing of c.30% and low cost of capital empower the REIT with financial capacity to acquire accretive assets. 
  • Maintain BUY with a revised TP of S$1.33 after rolling forward valuations and pricing in recently announced acquisition of Keppel DC Singapore 3 (KDC SG 3).


Acquisition of KDC SG 3 to power earnings forward; impact on DPUs estimated to be significant. 

  • The acquisition of KDC SG 3 further diversifies the REIT’s earnings base and fuels a stronger earnings growth trajectory of 5% going forward. Apart from being a significantly accretive deal, upside will come from the ability for management to garner tax transparency status, which allows an additional 3.5% upside to our estimates, which is not factored in.


Further flexibility to acquire post balance sheet recapitalisation exercise. 

  • The S$279.5m in new equity raised improved the REIT’s liquidity and further strengthened its balance sheet, positioning KDC REIT for another year of strong growth driven from acquisitions. This is supported by low gearing of c.30% coupled with low cost of capital. We have not factored in further acquisitions in our estimates.


Valuation

  • We currently have a BUY recommendation, with a DCF-backed TP of S$1.33. The stock offers attractive FY16F-17F yields of c.5.8-6.1% and upside will hinge on better-than-expected returns from acquisitions.


Key Risks to Our View

  • Rising interest rates. A faster than anticipated rise in interest rates will negatively impact distributions.




Derek Tan DBS Vickers | Mervin Song CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-11-29
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.33 Up 1.220






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