Keppel DC REIT - CIMB Research 2016-01-21: Riding on the Big Data boom

KEPPEL DC REIT AJBU.SI

Keppel DC REIT - Riding on the Big Data boom

KDC REIT is a unique pure-play data centre REIT in Asia. It owns nine data centres across key cities in Asia and Europe (AUM: S$1.07bn).
Unlike the other sub-segments which are facing a simultaneous supply glut and softening demand, KDC REIT is a beneficiary of the Big Data boom.
One of the longest WALE of 8.7 years in the sector, with in-built step-up of 2-4% p.a. Management has ambitious plans to double the REIT’s AUM in 3-5 years.

One of the fastest growing in the sector with DPU of 7 Scts for FY16, i.e. up 8% yoy.
Initiate with an Add rating and DDM-based TP of S$1.18. Top industrial S-REIT pick.

KDC REIT is Asia’s first data centre REIT, comprising nine fully-owned data centres (DCs) diversified across key cities in Asia and Europe, which are supported by excellent connectivity and infrastructure.
These are also regions where we see strong demand for DCs. For example, Singapore is home to 50% of DC capacity in ASEAN.
We estimate that KDC REIT is the third largest DC provider, providing c.8% of the 1.8m sq ft of net technical DC space in the city-state.

The increasing digitisation of the global economy is expected to drive growth in data creation and storage needs. BroadGroup estimates that the amount of data created globally will continue to grow at a CAGR of 47.4% in 2013-18, or more than seven-fold to exceed 28 zettabytes (1021 bytes). Other key demand drivers include the growing adoption of cloud computing and outsourcing, e-commerce, social networking, increasing compliance and regulatory requirements on data security.

KDC REIT has a high quality and sticky tenant base which consists of a diversified mix of blue-chip clients. Its top-ten tenants make up around 83% of its rental income.
By trade sector, the REIT has the highest exposure to the IT service (c.39% of rental income). Customers generally prefer operators/developers with a proven track record.
Moreover, due to high switching costs (i.e. customers have to run parallel operations to minimise downtime), customers are averse to physical relocation.

The REIT is backed by one of the longest WALE of 8.7 years in the sector, with in-built step-up clauses of 2-4% p.a.
We believe that growth would be acquisition-led, as management has ambitious plans to double KDC REIT’s AUM in the next 3-5 years. This is evidenced by the two acquisitions made within 12 months of the trust’s listings.
Altogether, we forecast DPU of 7 Scts for FY16 which represents 8% yoy growth over annualised FY15, making the REIT one of the fastest growing in the sector.

We value KDC REIT with DDM, using an equity discount rate of 8.2% and terminal growth of 3%.
Our valuation factors in for weaker currencies vs. the S$, 95% payout from FY18 and onwards (vs. 100% for FY16-17) and does not incorporate any potential accretion from new acquisitions.
KDC REIT is our top pick among industrial S-REITS.
Potential catalysts are accretive acquisitions and higher-than-expected rental reversion.

LOCK Mun Yee CIMB Securities | YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-01-21

CIMB Securities SGX Stock Analyst Report ADD Initiate ADD 1.18 Same 1.18