Keppel DC REIT - DBS Research 2016-04-14: Awaiting acquisitions

KEPPEL DC REIT AJBU.SI

Keppel DC REIT - Awaiting acquisitions

Low gearing offers capacity to tap sponsor acquisition pipeline
Acquisition of T27 to be completed in 2Q-3Q, behind our initial estimates
Earnings cut to account for smaller acquisition quantum and delay in completion timeline

Keppel DC REIT offers investors a 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.
The stock offers an attractive total return of 15% from current levels.

With foreign-sourced distributions fully hedged until 2H17, 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 will occur in 3Q16 (vs 2Q16 previously). Given that it is a related-party transaction, an EGM is likely to be called.
We have now assumed S$200m of acquisitions (vs S$250m previously) in our forecasts, to be completed in 3Q16.
Given revised forecasts, our estimates are cut by 8-19%.
We have also assumed a S$110m equity fundraising exercise to fund this deal.

DPU of 1.67 Scts is 1.2% above IPO forecasts, driven mainly from acquisitions.
Top line and net property income are 2.8% and 2.1% respectively on lower power-related revenues for cost recovery and ad hoc charges. This is offset by contribution from Intellicentre and net gains on settlement of forward exchange contracts.

We currently have a BUY recommendation, with DCF-backed TP of S$1.14.
The stock offers attractive FY16F-FY17F yields of c.6.3-7.0% for FY16 and upside will hinge on better-than-expected returns from acquisitions, or higher occupancies at co-location properties.

An earlier-than-anticipated completion of the acquisition from sponsor will mean upside to our estimates.

Derek Tan DBS Vickers | Mervin Song CFA DBS Vickers | http://www.dbsvickers.com/ 2016-04-14

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