Keppel DC REIT - DBS Research 2018-04-17: Acquisitions To Drive Earnings Growth Momentum

KEPPEL DC REIT AJBU.SI

Keppel DC REIT - Acquisitions To Drive Earnings Growth Momentum

Keppel DC REIT's 1Q18 DPU in line with estimates.
Contribution from maincubes DC to start from 2Q18; further acquisition, when announced, to drive earnings higher.
Priced in S$300m worth of acquisitions in our estimates.
Maintain BUY, Target Price S$1.60.

1Q18 gross rental income grew by 16.7% y-o-y to S$36.9m mainly on the contribution from an expanded portfolio from KDC Dublin 2 and KDC Singapore 3, higher variable income from KDC Singapore 1, and lower non-cash adjustment for Gore Hill DC. This was aided somewhat by the appreciation of the GBP and EUR against the SGD. The following factors more than offset the lower rental income from Basis Bay DC and Gore Hill DC.
Other income of S$1.1m mainly came from higher rental top-ups and power-related revenues. Net property income (NPI) rose by a higher 18.2% to S$34.1m mainly on the back of a smaller-than-proportionate increase in expenses (+16.0% y-o-y).
Distributable income, however, dipped 4.1% y-o-y to S$20.9m, mainly due to the one-off contribution of S$1.7m a year ago. Stripping that out, distributable income would have been higher marginally. DPU of 1.80 Scts was 3.4% higher y-o-y on an adjusted basis.
Cash flows from operating activities dipped to S$18.7m, largely due to higher working capital requirements. Net cash used in investing activities for 1Q18 was S$130.1m, mainly from the acquisition of maincubes DC, capex and deposit paid for the acquisition of the 999-year leasehold land interest in KDC DUB 1. This was mainly funded by S$136.6m in debt raised during the quarter.

Operational metrics generally improved with occupancy rate rising marginally to 93.7% (vs 92.6% in 4Q16) with a long weighted average lease expiry (WALE) of 9.6 years. This was mainly due to higher occupancy rates from the newly acquired properties and a marginal pick-up in take-up rates at KDC Dublin 1 & 2.
We understand that the manager has secured further take-up in the remaining c.9% space at KDC Dublin 2 which will be taken up soon. Planned capex of an estimated S$20m at KDC Dublin 1 is expected to drive overall power efficiency at the property.
Close to the quarter-end, the manager announced the completion of mindcubes DC in Germany. The commencement of a 15-year triple-net lease will start from 2Q18 onwards.
Overall gearing had inched up to 37.4% as of end-1Q18, a level which is transitional in our view, pending potential acquisition announcements. Cost of funds dipped slightly to 2.1% (vs 2.2% in 4Q17).

Our DPU estimates of 7.68 Scts and 8.1 Scts are the highest in the street and we believe consensus figures have not factored in acquisitions that can drive earnings higher than expected.
In our forecast, we 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.
Our Target Price of S$1.60 leads the market on the back of these assumed acquisitions.

Downside risk to our estimates and target price comes from higher-than-expected equity fund raising for acquisitions; a possibility given the low implied cost of capital that the REIT currently trades at.

Derek TAN DBS Vickers | Mervin SONG CFA DBS Vickers | http://www.dbsvickers.com/ 2018-04-17

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.600 Same 1.600