Keppel DC REIT - DBS Research 2017-10-17: More Acquisitions In The Pipeline

Keppel DC REIT - DBS Vickers 2017-10-17: More Acquisitions In The Pipeline KEPPEL DC REIT AJBU.SI

Keppel DC REIT - More Acquisitions In The Pipeline

  • Keppel DC REIT (KDC REIT) 3Q17 DPU increased by 16.8% y-o-y to 1.74 Scts due to four acquisitions, in line.
  • Acquired B10 in Dublin in September 2017 and lifted FY18 DPU by 5.5%.
  • More acquisitions in the pipeline, but could be partially funded by equity as its aggregate leverage approaches 40%.
  • Maintain BUY.



BUY for acquisition-driven growth. 

  • Keppel DC REIT (KDC REIT) remains one of the few REITs in Singapore that can acquire at a lower cost of capital. The REIT is projected to deliver a solid 5% CAGR in distributions supported by a series of acquisitions.
  • Maintain BUY with Target Price of S$1.44.


Where we differ: Our TP is higher than consensus. 

  • Our TP of S$1.44 is 4.3% higher than the consensus average of S$1.38. We believe this is because we have assumed a lower beta due to KDC REIT’s unique portfolio and high-quality assets.


Potential Catalyst: Acquisition spree. 

  • Over the last 12 months, KDC REIT has acquired four new properties, located at Cardiff, Singapore, Milan and Dublin. We believe with stable growth in the existing portfolio, DPU growth will be led inorganically by acquisitions. 
  • Given the REIT’s low cost of capital, the world is its playground for accretive acquisitions. After the legal completion of the committed purchase of maincubes (Main, Germany) in 2018, aggregate leverage is expected to surpass 40% which may trigger equity fund raising that implies potential DPU dilution.


Valuation

  • We maintain a BUY recommendation with a DCF-backed TP of S$1.44.


Key Risks to Our View


Competition from larger third-party data centre players. 

  • The data centre market is dominated by several large international operators which have been aggressively expanding into markets where KDC REIT has a presence. KDC REIT may face higher barriers to entry and stiffer competition to attract and retain tenants.


WHAT’S NEW - 3Q17 Results: Acquisition-driven growth 


Top line boosted by acquisitions: 

  • Gross rental income for 3Q17 increased S$12.3m or 56.4% to S$34.2m y-o-y, mainly contributed by the acquisitions of Milan DC (October 2016), Cardiff DC (October 2016), B10 DC (September 2017) and 90% interest in KDC SGP 3 (January 2017), offsetting lower rental income from Basis Bay DC. 
  • In addition, net overseas contributions increased due to the impact from the appreciation of GBP, EUR and AUD against SGD, partially offset by the impact from the depreciation of MYR against SGD. 
  • Net property income was 42.1% higher y-o-y at S$32.3m. DPU in 3Q17 was 1.74 Scts, 16.8% higher y-o-y.
  • 9M17 DPU summed to 5.22 Scts, representing 73.7% of our FY17 full-year forecast, given new asset B10 DC was only acquired at the start of 3Q17, the YTD DPU was in line with our forecast.

High portfolio occupancy though Basis Bay remains low: 

  • Portfolio occupancy is high at 93.4%, though no improvement has been seen at Basis Bay DC (Cyberjaya, Malaysia) after the single tenant (11.2% of FY16 revenue) renewed its lease with two-thirds of the space previously occupied. We had already made an adjustment to our earnings forecast last quarter. Portfolio WALE is long and healthy at 9.2 years.

Acquisition of B10 DC to be immediately accretive: 

  • KDC REIT announced the acquisition of Dataplex located at unit B10 of the Ballycoolin Business and Technology Park in Dublin at an agreed value of EUR66.0m (approximately S$101.3m). We estimate the NPI yield of the new asset to be 7.5% and contributions to be immediately accretive to DPU, lifting FY18F DPU by 5.5% to 7.72 Scts.

Possible equity fund raising upon completion of maincubes: 

  • Fully funded by debt, the acquisition of B10 will push aggregate leverage to a high 30%. After the committed purchase of maincubes (Main, Germany) in 2018 upon its legal completion, aggregate leverage is expected to surpass 40%. 
  • We believe further acquisitions are likely to tap on equity fund raising as Management expressed intention to keep the aggregate leverage below 40%, which implies potential DPU dilution. Currently, the REIT has a debt headroom of S$220m. Its average cost of debt is low at 2.3%.

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.




Singapore Research DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-10-17
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.440 Same 1.440



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