Keppel DC REIT - OCBC Investment 2018-04-17: Unexciting Valuations

Keppel DC REIT - OCBC Investment 2018-04-17: Unexciting Valuations KEPPEL DC REIT AJBU.SI

Keppel DC REIT - Unexciting Valuations

  • 1Q18 adjusted DPU +3.4% y-o-y.
  • Contribution from maincubes ahead.
  • Lower Fair Value marginally.

1Q18 results in-line with our expectations 

  • Keppel DC REIT (KDCREIT) reported its 1Q18 results which met our expectations. 
  • Gross revenue jumped 17.9% y-o-y to S$38.0m and this was largely driven by a full-quarter contribution from Keppel DC Dublin 2 and Keppel DC Singapore 3 (KDC SGP 3). This formed 25.0% of our FY18 forecast. 
  • DPU of 1.80 S cents constituted 23.7% of our full-year projection. Although this was a y-o-y decline of 4.8%, it was attributed to a one-off capital distribution of S$1.7m (~0.15 S cents per unit) in 1Q17 arising from the KDC SGP 3 acquisition. Excluding this, 1Q18 DPU would instead have grown 3.4% y-o-y.
  • Operationally, KDCREIT’s portfolio remains defensive, with a long portfolio WALE of 9.6 years (by leased area). Management has also hedged its forecasted foreign-sourced distributions till 1H19, while 80% of its borrowings are on fixed rate/hedged.

Potential dilution risks ahead 

  • Following the completion of its maincubes Data Centre acquisition in Germany on 30 Mar this year, KDCREIT’s aggregate leverage ratio has moved up to 37.4%. Given an estimated debt headroom of ~S$80.2m before reaching an aggregate leverage ratio of 40%, coupled with its end-2018 AUM target of S$2b (portfolio size of ~S$1.66b as at 31 Mar 2018) and long-term aggregate leverage target of 30%, we believe there are potential dilution risks in the near future. 
  • Recall that during KDCREIT’s acquisition of KDC SGP 3, management had undertaken an equity fund raising exercise to raise proceeds in excess of the purchase quantum so as to bring its gearing ratio down. 
  • We raise our FY18F DPU by 2.1% as we had previously assumed only six months of contribution from maincubes. However our FY20F-FY22F DPU projections are lowered by 0.7%-1.0% as we factor in higher borrowing costs from KDCREIT’s acquisition of the remainder of 999-year leasehold land interest in Keppel DC Dublin 1 for an agreed value of EUR30m, of which legal completion is expected in 1H20. 
  • Overall, our DDM-derived fair value estimate inches down marginally from S$1.51 to S$1.50. 
  • Although we remain constructive on KDCREIT’s long-term outlook, we do not find current valuations appealing, with FY18F distribution yield of 5.3% and P/B ratio of 1.5x, as at the closing price of S$1.46 on 16 Apr 2018. 
  • (Maintain HOLD)

Wong Teck Ching Andy CFA OCBC Investment | 2018-04-17
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 1.50 Down 1.510