Keppel DC REIT - OCBC Investment 2016-01-18: Some supply concerns, but prospects still bright

Keppel DC REIT - OCBC Investment 2016-01-18: 4Q15 results within our expectations KEPPEL DC REIT AJBU.SI 

Keppel DC REIT: Some supply concerns, but prospects still bright 

 4Q15 DPU 1.9% above IPO projection
 Focus on Citadel 100 
 Reiterate BUY and S$1.24 FV 

4Q15 results within our expectations 

  • Keppel DC REIT (KDCREIT) reported its 4Q15 results which met our expectations, but its DPU of 1.64 S cents came in slightly above management’s IPO forecast by 1.9%. However, gross revenue of S$24.8m was 2.1% below its projection, due to lower variable rental income from Singapore and depreciation of foreign currencies against the SGD. 
  • The former was partly caused by some accounting adjustments. For FY15, KDCREIT’s gross revenue and DPU was 1.7% and 1.9% above its IPO forecast at S$107.7m and 6.84 S cents, and this constituted 103.4% and 100% of our forecasts, respectively. 

Some hiccups at Citadel 100 

  • For FY16, KDCREIT has 11.8% of its leases (by leased lettable area) expiring. The bulk of this is made up by two major leases. Management updated us that it has reached a verbal agreement with one of the tenants (located at one of its Singapore properties) for a renewal of another five years. However the other tenant has decided to downsize its take-up at Citadel 100 Data Centre from 27,000 sq ft to 10,000 sq ft in 1Q16. This would result in the asset’s occupancy dropping from 77% to 52%. 
  • Notwithstanding this setback, management does not expect the resulting revenue decline to have a material impact to its distributable income. It would also actively seek to find a replacement. 

Maintain BUY 

  • Despite recent media reports highlighting a large expected increase in supply of data centres in Singapore this year, we note that the fitting out period can take a very long time from the TOP date and hence the impact may not be as bad as it appears. 
  • Moreover, we understand that a significant proportion of the upcoming supply has been pre-committed. 
  • Nevertheless, we do expect rental reversions to moderate, although overall demand for data centre space remains healthy. 
  • While we adjust our FY16 and FY17 DPU forecasts downwards by 3.0% on account of lower NPI margin assumptions, our fair value remains unchanged at S$1.24, as we roll forward our valuations. 
  • Maintain BUY on KDCREIT.

Wong Teck Ching Andy CFA OCBC Securities | http://www.ocbcresearch.com/ 2016-01-18
OCBC Securities SGX Stock Analyst Report BUY Maintain BUY 1.24 Same 1.24