Keppel DC REIT - DBS Research 2016-01-06: Data centre reit with big ambitions

SGinvestors.io

KEPPEL DC REIT AJBU.SI 

Keppel DC REIT - Data centre REIT with big ambitions 

Riding on the global data boom. 

• Keppel DC REIT offers investors unique exposure into the highly specialised and resilient data centre market. 
• With close to 70% of NPI derived from co-location leases, the Trust is poised to ride on rising global usage of data and demand for data centres. 
• Earnings are further supported by its master leased properties (30% of NPI) which have average annual escalations of 2-4%. 

Visible earnings growth profile underpinned by acquisition potential. 

• 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% 

Imputed S$250m of acquisitions into FY16 numbers. 

• We have assumed S$250m of acquisitions in FY16 to account for the purchase of T27; we have assumed the equity fundraising will bring gearing down to 30%, which is the Manager’s long term target level. 

Valuation: 

• 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 from acquisitions, or higher occupancies at co-location properties. 

Key Risks to Our View: 

• Higher maintenance capex relative to other asset classes. Keppel DC REIT is responsible for maintenance capex for certain properties in the portfolio. 
• Due to the shorter lifespan of a data centre’s infrastructure, it is possible that the REIT may have to rely on borrowings to fund these works, which would result in higher gearing levels, or there could be some pressure on the REIT’s cash flow, potentially affecting its ability to pay distributions.

Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-01-06

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.14 Same 1.14