Keppel DC REIT - DBS Research 2018-01-23: A Virtuous Cycle

Keppel DC REIT - DBS Vickers 2018-01-23: A Virtuous Cycle KEPPEL DC REIT AJBU.SI

Keppel DC REIT - A Virtuous Cycle

  • Assumed acquisitions of S$300m by end FY18F.
  • Equity fund raising of up to S$180m (60% of acquisition value).
  • 4Q17 results in line with expectations; stable occupancies throughout assets in portfolio.



BUY for acquisition-driven growth; raising our Target Price to S$1.60, the highest in the street. 

  • Trading at a yield of c.5.2%, Keppel DC REIT (KDC REIT) remains one of the few REITs in Singapore that can make accretive acquisitions, supported by low cost of capital. 
  • The REIT is projected to deliver solid 7% CAGR in distributions supported by ambitious growth plans. 
  • Maintain BUY with Target Price revised to S$1.60.


Where we differ: Our Target Price is higher than consensus. 

  • Our Target Price of S$1.60 is the highest in the street and we believe consensus have not factored in acquisitions that can drive earnings higher than expected. 
  • In our forecast, we have assumed acquisitions of S$300m by end 2018, funded by debt/equity (40%/60%) mix. This will bring AUM to S$2bn by end 2018, a target that should be achievable given a myriad of opportunities that the manager is reviewing.


Potential Catalyst: Rebound in operational performance. 

  • 4Q17 results was in line with expectations with sustained portfolio occupancy of c.92.6%. With limited expiries over the coming 2 financial years, there is high income visibility. 
  • A pick up in occupancies and rental reversionary prospects turning positive can lift our earnings estimates.


Valuation

  • We maintain our BUY recommendation with revised a DCF-backed Target Price of S$1.60.


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 - Virtuous cycle for growth 


Keppel DC REIT: 4Q/FY17 results 


Top line boosted by acquisitions. 

  • Gross rental income for 4Q17 was S$34.9m, up S$8.8m or 34.1% y-o-y, mainly contributed by acquisitions of KDC DUB 2 (Sep 2017), Milan DC (Oct 2016) and Cardiff DC (Oct 2016), and 90% interest in KDC SGP 3 (Jan 2017), as well as higher variable income from KDC SGP 1 due to higher recurring revenue. Overseas contributions increased due to the appreciation of AUD, GBP and EUR against SGD. 
  • Net property income (NPI) of S$32.6m was 30.9% or S$7.7m higher y-o-y. 
  • On a full year basis, gross rental income for FY17 was S$134.6m, an increase of 38.6% or S$37.4m from FY16, primarily thanks to acquisitions quoted above and the appreciation of AUD and EUR against SGD. These were partially offset by lower income from KDC SGP 2 and Basis Bay DC. NPI for FY17 was S$125.1m, 37.6% or S$34.2m higher y-o-y.
  • FY17 DPU summed to 7.12 Scts, up 16.0% y-o-y, representing 100.6% of our forecast, in line. The increase in DPU however was mainly due to a one-off capital distribution of c.S$1.7m (or 0.15 Scts per unit) paid in FY17, excluding which, DPU on an adjusted basis would have increased by 4.3% y-o-y.

Occupancy remains high above 90% despite slight slip q-o-q.

  • Portfolio occupancy dipped to 92.6% from 93.4%, mainly due to decrease in occupancy at KDC SGP 1 from 90.7% to 84.6%. There was no improvement at Basis Bay DC (Cyberjaya, Malaysia) after the single tenant (11.2% of FY16 revenue) renewed its lease for two-thirds of the space previously where occupancy remained at a low c.64% level. 
  • The occupancy at KDC DUB 1 (existing) and KDC DUB 2 (acquired in 3Q17) are still below the portfolio average, at 56.6% and 87.3% respectively. All remaining properties are fully occupied.
  • Portfolio WALE is long and healthy at 9.1 years, less than 5% of the leases will expire in each year in the next three years.

Portfolio value expanded due to acquisitions, though some of the existing properties registered revaluation loss. 

  • Value of deposited properties increased by 9.7% during FY17 to S$1.70bn from S$1.55bn led by an expanded portfolio. However, some of the existing properties (especially Gore Hill in Australia) registered revaluation losses due to lower cashflow projected by an independent valuation done in 4Q17, leading to a net decline of S$8.5m in fair value of investment properties reported over the quarter. 
  • NAV was steady at S$0.93.

Strong financial metrics. 

  • Average cost of debt was slightly lower q-o-q from 2.3% to 2.2% p.a. No debt is due for renewal in FY18. 
  • Gearing inched higher slightly but is still a conservative 32.6%.

Acquisition momentum to continue; possible equity fund raising post completion of maincubes in 2Q18: 

  • Portfolio gearing remains at a conservative 32.6% (vs 28.3% a year before), implying ample capacity for debt-funded opportunities. On our estimates, the committed acquisition of maincubes (Main, Germany) in 2Q 2018, will bring AUM to S$1.65bn, and push gearing towards 38%. That said, the manager has alluded to looking at further acquisition opportunities and maintains that the REIT’s S$2bn AUM target by end 2018 is attainable.
  • Markets in Asia Pacific and Europe remain core markets to invest and grow the portfolio. As such, we believe further acquisitions are likely and we have priced in further acquisitions of S$300m in our estimates @ 6.5% yield. 
  • In addition, we have assumed equity fund raising (EFR) of S$180m at S$1.35/unit (c. 8% discount from last close of S$1.47/share). We forecast gearing will reach a more optimal level of c.38%.
  • Given revised acquisition estimates, our Target Price is raised to S$1.60, and FY19 DPU is raised by 4%. Maintain BUY.






Singapore Research DBS Vickers | Derek TAN DBS Vickers | Mervin SONG CFA DBS Vickers | http://www.dbsvickers.com/ 2018-01-23
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.60 Up 1.440



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