Keppel DC REIT - CIMB Research 2017-04-17: Boosted By Acquisitions

KEPPEL DC REIT AJBU.SI

Keppel DC REIT - Boosted by acquisitions

1QFY17 DPU of 1.89 Scts (+13.2% yoy) was within expectations, making up 25% of our full-year estimate.
Portfolio occupancy inched up to 95.1% (vs. 94.4% as at Dec 16), long WALE of 9.2 years.
Minimal lease expiries in FY18-20, S$15m AEI for Dublin 1 in the works.

KDCREIT reported a 30.1% jump in gross revenue to S$32.2m while NPI surged 36.1% to S$28.8m, thanks to contributions from acquisitions in Milan, Cardiff as well as SGP 3. This was partly offset by lower income from Dublin 1 and lower variable income from SGP 1 and SGP 2.
DPU of 1.89 Scts included a one-off 0.15 Scts (S$1.7m) capital distribution arising from the later completion of SGP 3.

KDCREIT renewed one of the major contracts, expiring in 2017, for five years for a colocation DC in Singapore, at a marginally higher rate.
At the same time, it also increased occupancy for SGP DC1 by 2.6% pts to 87.3%. Another three remaining leases, making up 10.9% of portfolio NLA, are up for renewal in FY17 and we understand that two of these leases have reached agreements in principle.
There are minimal lease expiries in FY18-20, thus providing KDCREIT with income certainty over the next few years.

Occupancy for Dublin 1 remains at 55.9% and we think it could take some time for the manager to fill the space. In the meantime, the manager is planning a S$15m AEI to improve the energy efficiency of the property to enable it to position the property more competitively.

Gearing stands at 27.9% as at end-1QFY17. Assuming a target gearing of 40%, this would give KDCREIT debt headroom of c.S$300m. The trust would continue to look to grow via inorganic means and continue to be on a lookout in key locations, including European cities such as Paris.

We leave our FY17-19 DPU estimates unchanged. With a largely locked-in interest cost and overseas income hedged until 2HFY18, KDCREIT offers investors good income visibility.
We raise our DDM-based target price slightly to S$1.26 (from S$1.21) following our sector-wide decrease in our Singapore discount rate. Maintain an Add rating with a potential c.10% total return.

Potential catalysts include a faster-than-expected pick-up in rental rates as the oversupply situation is digested. Risks are slower-than-projected pick-up in occupancy for Dublin 1.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-04-17

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.260 Up 1.210