Keppel DC REIT - CIMB Research 2016-07-18: Some meat left in the game

KEPPEL DC REIT AJBU.SI

Keppel DC REIT - Some meat left in the game

1HFY16 DPU of 3.34 Scts (+3.4% yoy) was within our and consensus expectations, at 48% of our full-year estimate. 2Q16 made up 24% of our FY16F.
We are slightly cautious after the results call as renewals were not inspiring. That said, we think that the renewals should not be reflective of the portfolio.
One-off gain of c.S$2m for the refund of excess property tax to be distributed in 3Q.

We remain constructive on KDCREIT as it is one of the few compelling bottom-up stories. Catalysts include acquisitions and revaluations.

KDCREIT achieved a S$14.8m distributable income in 2Q16 (+3.3% yoy, 1% higher than IPO forecast).
Results were however side-lined as attention was squarely placed on the two renewals done in the quarter.
Portfolio occupancy increased to 92.3% (1Q16: 92%) with additional take-up in Dublin 1 (f.k.a. Citadel 100).
An existing client renewed a lease for 5 years and took additional 1,600 sq ft space, taking occupancy of Dublin 1 to 55.3% (1Q16: 52.8%). The renewed rent was flat over pcp.

KDCREIT also signed a forward renewal of one of the major contracts expiring in late- 2017 in one of the Singapore properties (believed to be Singapore 1, f.k.a S25). The contract was renewed for more than five years; and the REIT secured commitment from the customer to expand by 6,800 sq ft. Half of the new space would be taken up in 2H16, the other half in 2H17. As a result, occupancy of Keppel DC could increase to 91.9% from current 85.7%.

That said, the net effect of the rental reversion is negative as KDCREIT would earn about the same revenue from the forward renewal (incl. the enlarged space) as for the existing contract.
Management said
1. the strategic importance of the customer;
2. the longer contract term, and
3. competitive pressure, were some of the reasons behind the negative rental reversion.
While we believe this renewal should not be reflective of future renewals, we temper our rental reversions to acknowledge the presence of competition.

While our takeaway from the results call was more cautious than previously, we remain constructive on KDCREIT as it is one of the few compelling bottom-up stories within our coverage.
Ultimately, acquisitions and potential revaluation gains lead us to remain in the “bull” camp (refer to overleaf for details).

We lift our FY18 DPU by 12% as we re-align our unit base with the incoming contribution from maincubes.
We now assume a 100% payout from FY18 (prev. 95%) as we could be overly-conservative.
Our TP is raised by our across-the-board cut in Rf (from 2.9% to 2.2%). The new TP (S$1.27) implies a forward yield of 5.4% and P/BV of 1.4x, slightly above the 1 s.d. above mean of well-favoured big cap REITs.
But if revaluations flow through year- end, the stock could trade at 1.15-1.3x P/RNAV, a not-too-stretched metric, in our view.

YEO Zhi Bin CIMB Securities | LOCK Mun Yee CIMB Securities | http://research.itradecimb.com/ 2016-07-18

CIMB Securities SGX Stock Analyst Report ADD Initiate ADD 1.27 Up 1.18