Keppel DC REIT - DBS Research 2017-01-24: The world’s my playground, acquisitions to come!

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KEPPEL DC REIT AJBU.SI

Keppel DC REIT - The world’s my playground, acquisitions to come!

• 4Q16 results in line; earnings contribution to spike in FY17 with acquisition of KDC 3 
• Organic growth outlook remains mixed 
• Low gearing of c.30% provides headroom for more acquisitions

BUY with S$1.30 TP. 

• Keppel DC REIT (KDC REIT) remains one of the few REITs in Singapore that has the ability to acquire at a lower cost of capital. The REIT is projected to deliver a solid 5% CAGR in distributions supported by positive market dynamics.
• Low gearing of c.30% and low cost of capital empower the REIT with financial capacity to acquire accretive assets. Maintain BUY with a revised TP of S$1.30 after pricing in a dip in rental in Singapore.

Acquisition of KDC SG 3 to power earnings ahead; impact on DPU to be significant. 

• The acquisition of KDC SG 3 further diversifies the REIT’s earnings base and fuels a stronger earnings growth trajectory of 5% going forward. 
• Apart from being a significantly accretive deal, it has tax transparency status which has been approved by the IRAS. 
• Earnings contribution from KDC 3 will start from FY17 onwards. With an under-geared balance sheet of 30%, the REIT remains on the prowl for more assets.

4Q16 results in line: 

• Keppel DC REIT (KDC REIT) reported a stable set of results with DPU coming in flat at 1.67 Scts (vs IPO forecasts) but 1.8% higher y-o-y, adjusted for recent preferential offering to fund its recently acquired Keppel Datacentre 3 (KDC3). 
• With the acquisition of KDC3 completed in Jan 2017, the REIT is expected to see a significant uplift in topline in 1Q17.

Valuation

• We currently have a BUY recommendation, with a DCF-backed TP of S$1.30 after slight adjustments to account for a moderation in reversion rates in Singapore.

Key Risks to Our View

• Rising interest rates. A faster than anticipated rise in interest rates will negatively impact distributions.

Derek TAN DBS Vickers | Mervin SONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-01-24

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.30 Down 1.330