Keppel DC REIT - OCBC Investment 2017-01-24: Reiterate BUY with higher FV

KEPPEL DC REIT AJBU.SI

Keppel DC REIT - Reiterate BUY with higher FV

Keppel DC REIT (KDCREIT) reported 4Q16 results which met our expectations. Gross revenue grew 8.4% YoY to S$26.8m due to maiden contribution from Cardiff DC and Milan DC, coupled with higher variable income at its Singapore properties, but partially offset by the depreciation of the GBP and MYR against the SGD.
DPU dipped 20.1% YoY to 1.31 S cents largely due to an enlarged unit base arising from KDCREIT’s pro-rata preferential offering exercise in Oct last year, while contribution from Keppel DC Singapore 3 (KDC SGP 3), which is to be funded by proceeds from the preferential offering exercise, has yet to kick in. Completion of the acquisition was only completed on 20 Jan this year. Excluding this impact, adjusted DPU would have increased 1.8% YoY to 1.67 S cents.
KDCREIT said it has been granted tax transparency treatment for its share of the taxable income from KDC SGP 3, similar to its other two existing Singapore properties.
For FY16, KDCREIT’s gross revenue was down 3.2% to S$99.1m, while DPU fell 5.7% to 6.14 S cents, with the latter forming 97.4% of our full-year forecast.
We had assumed one month of contribution from KDC SGP 3 in FY16. If we stripped this out, KDCREIT’s FY16 DPU would have been 0.4% shy of our projection.
Adjusted DPU for FY16 (excluding impact from preferential offering and one-off property tax refund in 3Q16) was 6.68 S cents, or 2.6% higher than in FY15.

KDCREIT’s occupancy stood at 94.4%, as at 31 Dec 2016, up 1.7% QoQ.
Portfolio WALE (by NLA) remains healthy at 9.6 years. 83% of its borrowing costs have been hedged, while its foreign-sourced distribution up to 1H18 has also been hedged.

We incorporate KDCREIT’s full-year results in our model, update our FX assumptions (weaker MYR and GBP but stronger AUD) and raise our cost of equity assumption slightly from 8.0% to 8.1% due to a higher risk-free rate input of 2.7% (previously 2.4%).
Rolling forward our valuations, our fair value estimate is bumped up from S$1.35 to S$1.39.
Maintain BUY on KDCREIT, which remains as one of our top picks within the S-REITs space.

Andy Wong Teck Ching CFA OCBC Investment | http://www.ocbcresearch.com/ 2017-01-24

OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 1.390 Up 1.350