Keppel DC REIT - DBS Research 2017-07-18: Earnings Growth Momentum Not Dented By Dip In Basis Bay

Keppel DC REIT - DBS Vickers 2017-07-18: Earnings Growth Momentum Not Dented By Dip In Basis Bay KEPPEL DC REIT AJBU.SI

Keppel DC REIT - Earnings Growth Momentum Not Dented By Dip In Basis Bay

  • Top line up 37.6%, boosted by acquisitions.
  • Adjusted 1H17 DPU up 4.1% y-o-y, in line with our revised forecast (down 1.2% from previous forecast).
  • Trimmed FY17-18F DPU by c.1% to account for vacancy at Basis Bay, Malaysia.
  • Target Price raised to S$1.40 as earnings rolled forward; maintain BUY.

What’s New 

Top line boosted by acquisitions. 

  • Keppel DC REIT's Gross revenue increased by 37.6% or S$9.2m y-o-y to S$33.8m in 2Q17, mainly contributed by the acquisitions of Milan DC (October 2016), Cardiff DC (October 2016) and 90% interest of KDC SGP 3 (January 2017). This was offset by a dip in power and and recurring revenues and KDC Singapore 1 and 2. 
  • DPU increased to 1.74 Scts, up 4.2% y-o-y. 
  • Noting that KDCREIT declares distributions on a half-yearly basis, 1H17 DPU was 3.63 Scts, which includes a one-off item arising from the delayed completion of KDC SGP3 on 19 January 2017, where the vendor had agreed to pass all rights and obligations to the REIT as if completion had occurred on 1 December 2016. This equates to a capital distribution of S$1.7m for December 2016 or 0.15 Sct per unit – stripping out which, 1H17 DPU would have been 3.43 Scts, up 4.1% y-o-y, and represents 48.4% of our previous FY17 full-year forecast and 48.9% of our revised forecast (due to partial renewal at Basis Bay, see below).

Dip in occupancy due to Basis Bay. 

  • Portfolio occupancy dipped to 93.1% from 95.1% over the quarter, due to the drop in occupancy at Basis Bay Data Centre in Cyberjaya, Malaysia, from full to 63.1%. 
  • The single tenancy at Basis Bay (11.2% of FY16 revenue) has been renewed for five years with two-thirds of the space previously occupied. As a consequence, the property is re-classified from fully-fitted to co-location. We have made a conservative estimate of the time that will be taken to fill up the space returned, and as such have cut our DPU forecast by c.1% for FY17-19F.
  • Other than Basis Bay, little improvement was seen at Keppel DC SGP 1 and Keppel DC Dublin 1 which are still hovering around 88% and 56% respectively. All other assets are fully occupied. WALE still stood long at 9.2 years.

Capex and construction in Europe. 

  • Capex works of S$15m at Keppel DC Dublin 1 will commence in 4Q17 to improve overall power efficiency. Construction of maincubes Data Centre is on track for completion in 2Q18.

Debt headroom to fund future acquisitions. 

  • Aggregate leverage remained low at 27.7%, leaving debt-raising flexibility for future acquisitions. Cost of debt is low at 2.2% p.a. and average debt tenure is 3.3 years. NO debt is due in FY17. 83% of borrowing costs is hedged.

Our View

  • As we roll over the discounted earnings for another financial year, our Target Price is raised to S$1.40. We have cut DPU forecast by about 1% for this and next financial year to account for the vacancy at Basis Bay in Malaysia. Total return exceeds 10%, accounting for 6% price upside and 5% yield.
  • Maintain BUY.
  • We believe more acquisitions are on the horizon, which should offset the otherwise weak rental growth in its Singapore portfolio.

Singapore Research DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-07-18
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.40 Up 1.300