Keppel DC REIT - OCBC Investment 2018-05-07: King Of The Land

Keppel DC REIT - OCBC Investment 2018-05-07: King Of The Land KEPPEL DC REIT SGX: AJBU

Keppel DC REIT - King Of The Land

  • DPU and NAV accretive acquisition.
  • Expecting tax transparency.
  • Gearing to decline.

Proposed acquisition of Kingsland Data Centre

  • Keppel DC REIT (KDCREIT) has proposed to acquire a 99.0% interest in Kingsland Data Centre, a five-storey purpose-built carrier-neutral data centre located at 13 Sunview Way in Singapore. 
  • The estimated purchase consideration is ~S$141.2m based on an agreed property value of S$295.1m and after adjusting for net liabilities of S$153.9m. 
  • There will be a rental support given to KDCREIT for a period of 12 months after the acquisition completion date (expected in 2Q18) not exceeding S$8.0m. The rationale for this rental support is because the current occupancy stands at 67.7%. However, agreements have been executed such that the IT power in the property has been fully committed, and as a result the occupancy will eventually increase to 84.2%, with the vacancy being office space, which typically commands lower rental than data centre space on a psf basis. 
  • The initial NPI yield is expected to be 6.8% based on the current occupancy and including rental support. This will progressively increase to ~7.8% based on the pre-committed occupancy of 84.2%, subject to how quickly the clients ramp up their racks in the property. 
  • Further upside is also possible should management be able to lease out the vacant office space.

Expected to be DPU accretive despite full equity funding

  • KDCREIT intends to finance this acquisition with net proceeds of S$298.9m from a private placement exercise of 224m new units at S$1.354 per new unit and remaining net proceeds from the pro-rata preferential offering launched on 17 Oct 2016. 
  • The total acquisition cost works out to ~S$309.6m, which includes the repayment of borrowings of the target entity to be acquired and other fees. Factoring in these transactions in our model, we raise our FY18 and FY19 DPU forecasts by 2.3% and 2.9%, respectively. NAV per unit is also expected to increase by 6% from S$0.97 to S$1.03. 
  • We expect tax transparency to be granted by IRAS, similar to the treatment given to its KDC SGP 3 acquisition.

Gearing to decline to 32.1%

  • Besides being DPU and NAV accretive in nature, KDCREIT’s gearing ratio is also estimated to decline from 37.4% to 32.1% after completion of the private placement and this acquisition. 
  • Our DDM-derived fair value estimate increases from S$1.50 to S$1.54.
  • (Upgrade to BUY)

Wong Teck Ching Andy CFA OCBC Investment | https://www.iocbc.com/ 2018-05-07
SGX Stock Analyst Report BUY Upgrade HOLD 1.54 Up 1.500