Keppel DC REIT - OCBC Investment 2017-11-20: Reaffirming Our Positive View

Keppel DC REIT - OCBC Investment 2017-11-20: Reaffirming Our Positive View KEPPEL DC REIT AJBU.SI

Keppel DC REIT - Reaffirming Our Positive View

  • APAC data centre revenues to double 
  • Room for more acquisitions 
  • Raise FV and reiterate BUY 

Robust demand drivers 

  • Looking ahead to 2018, we believe outlook for the data centre industry remains largely sanguine, especially for the APAC region. Keppel DC REIT (KDCREIT) is poised to be a beneficiary of this trend, in our view, given its significant exposure to the region. 
  • According to Frost & Sullivan, revenue for the APAC data centre market is projected to double from US$16b this year to US$32b by 2022. Singapore is a key data centre hub in the region. Encouragingly, supply pressures are easing. 
  • Based on a CBRE report, the new supply entering the Singapore market over the next 24 months is expected to be more moderate as compared to the past two years. 
  • We expect demand to remain robust, underpinned by secular growth trends such as cloud computing, e-commerce and big data requirements, and supported by Singapore’s infrastructure and Smart Nation initiatives. 

On track to meet AUM target of S$2b by 2018 

  • KDCREIT’s most recent acquisition was the B10 Data Centre in Dublin, Ireland, for an agreed value of EUR66.0m (including a 999-year leasehold interest). Including this acquisition and its maincubes data centre in Germany which is currently under construction, we estimate that KDCREIT’s AUM is now ~S$1.7b, which is on track to meet management’s S$2b AUM target by 2018. 
  • Our back-of-the-envelope calculation suggests that should KDCREIT finance S$300m worth of acquisitions in FY18 using a debt-to-equity mix of 25%/75%, our annualised DPU accretion works out to be 2.9%. This is based on the following assumptions: 
    • NPI yield of 7.5%; 
    • cost of debt of 2.5%; 
    • effective tax rate of 15%; 
    • new unit issuance price of S$1.33; 
    • acquisition fees payable in units. 
  • Gearing ratio would be 35.8%. 

Maintain BUY 

  • Factoring in the Dublin acquisition and adjusting our cost of equity assumption downwards from 8.1% to 7.8%, we raise our FY18F DPU forecast by 2.6% and bump up our fair value estimate from S$1.39 to S$1.50. 
  • Although FY18F P/B ratio of 1.47x may appear steep, this still compares favourably to other global listed data centre REITs (~2.4x – 5.7x forward P/B), and comes in at only a slight premium to Mapletree Industrial Trust (1.41x FY18F P/B), which owns more traditional industrial assets. 
  • Maintain BUY.

Wong Teck Ching Andy CFA OCBC Investment | 2017-11-20
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 1.50 Up 1.390