Keppel DC REIT - DBS Research 2015-11-02: First data centre REIT in Asia

Keppel DC REIT - DBS Research 2015-10-29: A sweet first deal in Germany KEPPEL DC REIT AJBU.SI 

Keppel DC REIT - First data centre REIT in Asia 

  • Leveraging on Sponsor’s excellent track record. 
  • Visible earnings profile with upside from acquisitions. 
  • Maintain BUY, TP S$1.14. 

Leveraging on Sponsor’s excellent track record. 

  • With two Tier- III data centres offering close to 150k sqft of carrier neutral DC space in, Keppel DC REIT is poised to ride on Singapore’s rising importance as the data centre hub of Southeast Asia. 
  • These data centres store mission critical computer servers and hardware, where there is a high need for operational reliability, and where tenants prefer to stick with reputable data centre operators. In that regard, Keppel DC REIT is able to leverage on the operational acumen of its Sponsor Keppel T&T, which has a long operational history and track record. 

Stable and visible earnings profile. 

  • The Trust offers investors a stable and visible earnings growth profile, with 30% of NPI derived from long-dated master leases and with embedded rental step-ups of 2-4% p.a. With 61% of leases by rental income due for renewal between 2015 and 2017, earnings will be further driven by positive rental reversions and higher occupancies at its co-location data centres in Singapore (T25, S25), Australia (part of Gore Hill), and Ireland (Citadel 100). 
  • As it stands, the Trust has a WALE of 2.6 years for co-location properties, 9.9 years for fully fitted properties, and 16 years for shell & core properties. 

Upside from acquisitions. 

  • With foreign sourced distributions fully hedged until 1H17, and 90% of borrowings hedged into fixed rate debt, Keppel DC REIT stands out for its stable and highly visible earnings profile. 
  • Earnings catalyst will come from the acquisition of T27, which we believe could occur in 1H16. While an acquisition of >S$250m is expected to trigger an equity fund-raising exercise, we believe the acquisition will be accretive to earnings given that the stock is trading at a low implied cap rate of 6.3%. 

Maintain BUY, TP S$1.14. 

  • We currently have a BUY recommendation, with DCF-backed TP of S$1.14. 
  • The stock offers attractive yields 6.5% for FY16 and upside will hinge on better- than-expected returns co-location properties.

Rachael TAN DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2015-10-29
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.14 Same 1.14