Keppel DC REIT - CIMB Research 2016-08-12: Forza Milan!

Keppel DC REIT - CIMB Research 2016-08-12:  Forza Milan! KEPPEL DC REIT AJBU.SI

Keppel DC REIT - Forza Milan!

  • Today, KDCREIT announced its acquisition of a data centre in Milan. The price tag of €37.3m (S$57.3m) implies acquisition NPI yield of 6.5%.
  • Acquisition to be fully funded by 5-year euro debt. We expect it to be DPU-accretive.
  • This was not entirely a surprise, as we earlier noted that there could be more than one acquisition in 2016. The acquisition provides income and client diversification.
  • Given the manager’s desire to keep gearing at 30%, the acquisition hints at larger equity fund raising (EFR).
  • We raise FY16-18F DPU by 0.4-2.2% on the back of the acquisition. Maintain Add, with a slightly higher DDM-target price of S$1.29.

First foray into Italy 

  • KDCREIT has made its first purchase of the year, with the acquisition of the shell and core building of a data centre in Milan, Italy. The price tag of €37.3m (S$57.3m) is in line with market valuation and implies acquisition net property income (NPI) yield of 6.5%.
  • The acquisition would be funded by 5-year euro debt (provides natural hedging) and is expected to be DPU-accretive. We expect the acquisition to be completed by end-Sep.

More information on the acquisition 

  • The data centre comprises three interconnected four-storey buildings with total net lettable area (NLA) of 165k sq ft. The facility is sited on 129k sq ft of freehold land that is c.8km away from the Milan city centre. 
  • The data centre is fully leased to one of the world’s largest telcos on a double-net lease for 12 years until Dec 2027 (with embedded annual rental escalations), plus a six-year renewal option (unless the customer notifies otherwise). 
  • Additionally, KDCREIT will be granted a rent top-up until end-18.

Income and client diversification 

  • The acquisition is not entirely a surprise as we earlier noted that there could be more than one acquisition in 2016. The acquisition enhances the REIT’s income stability, with a 12-year double-net lease and adds one of the world’s largest telcos to the trust’s clientele. 
  • Post-acquisition, shell and core leases would make up 9.8% of lease income (vs. 6.2% pre-acquisition ) and WALE is expected to rise from 8.7 years to 9.3 years.

Acquisition hints at a larger equity fund raising (EFR) 

  • In addition, we expect gearing to increase from 29.1% at end-1H16 to 32.5% postacquisition.
  • Given the manager’s desire to keep gearing at 30%, we believe that the impending EFR (which would be accompanied by the acquisition of Keppel DC SG 3) will be larger than previously thought. We assume a price tag of S$230m for SG 3 and estimate that KDCREIT will aim to raise S$190m-S$195m in proceeds.

Maintain Add; growth to be powered by acquisitions 

  • Incorporating the acquisition, we lift FY16-18F DPU by 0.4-2.2%, which raises our DDM-target price slightly. 
  • We believe that in the next two years, KDCREIT will deliver healthy growth, powered by acquisitions. Ultimately, success breeds success. The estimated doubling of KDCREIT's assets under management (AUM) from the current S$1.1bn to S$2bn by 2018 would also attract more institutional interest

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2016-08-12
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.290 Up 1.270