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

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

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.

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.

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