Keppel DC REIT - CIMB Research 2016-08-03: Healthy demand to mop up supply

Keppel DC REIT - CIMB Research 2016-08-03: Healthy demand to mop up supply KEPPEL DC REIT AJBU.SI 

Keppel DC REIT - Healthy demand to mop up supply

  • Despite some supply pressures, we remain confident that healthy demand should quickly mop up supply.
  • The stock’s growth story is powered by acquisitions; and success breeds success.
  • Maintain Add with an unchanged DDM-based TP (S$1.27). KDCREIT remains one of our top picks.

KDCREIT’s first trip to Kuala Lumpur, Malaysia

  • We recently spent some time on the road in KL with the Manager of KDCREIT – CEO Mr Chua Hsien Yang and IR Ms Liang Huihui. 
  • Interests from investors were hearty, though we sensed that Malaysian investors are not as familiar with the stock as their Singapore and Hong Kong counterparts.

Healthy demand to mop up supply

  • Discussions centered around demand-supply dynamics, with investors concerned on the negative rental reversion for the forward renewal of a Singapore lease in 2Q16. 
  • We emphasize that while the incoming GFA/power capacity in Singapore appears to be high, supply would not be instantaneous. Take for example, SG3 which was progressively fitted out. 
  • Also, investors should also discern which incoming supply is natural competition and which is carrier competition (ie. SingTel).

Brexit could be positive for KDCREIT

  • GV7 DC is KDCREIT’s only asset in the UK, making up c.7% of its portfolio. The entire facility is on a long master lease to a well-established client until 2027. Further, the Manager has hedged foreign-sourced income two years out. 
  • More importantly, the Manager deemed that EU Data Protection Regulation could mean a two-way data migration between the UK and EU. This spells demand for more DCs in EU and UK.

WALE of 8.7 years by NLA, one of the longest among S-REITs

  • 7.2% of NLA is up for renewal in 2H16 and 19.1% in 2017. A significant portion of the lease expiry in 2016 pertains to a Singapore lease which would be expiring in 3Q16. There is high chance for the lease to be extended for another five years. 
  • There are three major leases up for renewal in 2017. One of the leases pertains to Basis Bay DC, which we believe should be extended. The second lease and third lease relates to a Singapore and overseas lease respectively.

Target to double AUM to S$2bn by 2018

  • The growth of KDCREIT would be powered by acquisitions. The Manager has an ambitious target to double the REIT’s AUM to S$2bn by 2018. 
  • Taking into account the ROFR assets which could be injected by then (SG3 and Almere 2), we estimate that the REIT needs to acquire about S$600m worth of third-party assets. Target markets include North Asia and Europe. 
  • Also, we believe a larger AUM could attract more institutional following and increase the stock’s liquidity. 
  • Add maintained.

YEO Zhi Bin CIMB Securities | LOCK Mun Yee CIMB Securities | 2016-08-03
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 1.27 Same 1.27