Keppel DC REIT - CIMB Research 2017-07-17: Fairly Priced

KEPPEL DC REIT AJBU.SI

Keppel DC REIT - Fairly Priced

Keppel DC REIT (KDCREIT)'s 1H17 DPU of 3.63 Scts (+8.7% yoy) was in line with consensus and our expectations, at 49% of our full-year forecast. 2Q17 DPU of 1.74 Scts was at 23%.
KDCREIT continues to deliver steady results, though renewals have been uninspiring.
Portfolio occupancy fell by 2% pts qoq to 93.1% (as at end-Jun) as one of the three floors at Basis Bay Data Centre has been returned.

We lower our FY17F-19F DPU by 1-1.6% largely to factor in lower occupancy at Basis Bay and slightly lower interest income.
Downgrade the stock from Add to Hold as we only project total returns of 3%.
KDCREIT trades at a 5.6% FY17F yield and 1.36x current P/BV.

KDCREIT continued to deliver steady results, though renewals have been uninspiring.
2Q17 DPU grew 4.2% yoy to 1.74 Scts powered by the three acquisitions in 4Q16 (Milan, Cardiff and SGP 3), and partially offset by lower variable income from SGP 1 and 2 as well as lower overseas contributions due to weaker FX against the S$.

The Basis Bay lease has been renewed for another five years. However, the client will return one data centre floor and will continue to lease the two remaining data centre floors. As a result, portfolio occupancy fell by 2% pts qoq to 93.1% (as at end-Jun).
Meanwhile, in-principle agreements have been reached for the two other major leases due for expiry in 2017, and the existing clients would be retaining their respective spaces.
5.1% of NLA (net leaseable area) is due for expiry for the remainder of 2017.

As the Basis Bay client has so far been unable to fill up one of the floors, we believe that the vacancy issue could be structural. Going forward, we have conservatively modeled in 63.1% occupancy for Basis Bay, resulting in 1-1.6% decrease in our FY17F-FY19F DPU.
Also, there were no specific disclosures on rent reversions. We had previously factored in -5% reversion to the prevailing rent at expiry. The Basis Bay client would continue to undertake facility management, and hence no additional expenses would be incurred.

The manager refinanced euro and sterling-denominated loans which were maturing in 2018, and extended debt maturity to 3.3 years as at 30 Jun (2.9 years as at 31 Mar).
Balance sheet remains best-in-class, with aggregate leverage and average cost of debt at 27.7% and 2.2%. p.a. respectively.
The manager continues to source for acquisition deals but commented that they have been hard to come by in 1H17. The competitive environment for Singapore has stabilised, and trends are largely the same qoq.

As we only project total returns of 3%, we downgrade the stock from Add to Hold.
We nudge up our DDM-based Target Price (from S$1.26 to S$1.28) as we lower our Singapore risk free rate to factor in the flattening yield curve.
Upside risks spring from accretive acquisitions while downside risks could come from negative rental reversions and weaker foreign currencies against the S$.
KDCREIT trades at a 5.6% FY17F yield and 1.36x current P/BV.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-07-17

CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 1.28 Up 1.260