Keppel DC REIT - Phillip Securities 2018-05-08: Bulking Up On SGP

Keppel DC REIT - Phillip Securities 2018-05-08: Bulking Up On Sgp KEPPEL DC REIT SGX: AJBU

Keppel DC REIT - Bulking Up On Sgp

  • Acquisition of data centre in Singapore, which will be renamed KDC SGP 5.
  • Launch of Private Placement to fund the acquisition.
  • Upgrade to Accumulate; higher target price of $1.51 (previously $1.47).

What is the news?

  • Launch of Private Placement of 224mn New Units to raise gross proceeds of S$303.07mn. The issue price of each New Unit is S$1.353, which is a 4.9% discount to the volume weighted average price of S$1.422 for trades done on 4 May 2018. Approximately S$298.9mn will be used to partially fund the acquisition and S$4.2mn to pay estimated fees and expenses. Remaining S$10.7mn of acquisition cost to be funded from the balance of proceeds of the Preferential Offering launched in October 2016.
  • Advanced Distribution of 2.75 cents. The Advanced Distribution will be declared, in connection with the Private Placement. This is to distribute to existing unitholders their pro rata entitlement of DPU, before the New Units are issued (estimated on 16 May).
  • Acquisition of 99% interest in property located at 13 Sunview Way by way of acquiring 99% interest in Kingsland Data Centre Pte Ltd. The property is a five-storey, colocation data centre with three tenants from the internet enterprise and IT services trade sectors.

How do we view this?

The Positives

  • DPU accretive on a pro forma basis for FY17, if the acquisition was completed on 1 January 2017. The manager expects +4.3% accretion if tax transparency is granted and +0.6% accretion if tax transparency is not granted. This is assuming that the acquisition is fully-funded by equity.
  • Paying down debt and lowering gearing from 37.4% to 32.1%. Gross proceeds from the Private Placement will be used to acquire the property at 13 Sunview Way and repay debt of Kingsland Data Centre Pte Ltd. No new debt will be used and the acquisition is effectively fully-funded by equity.
  • Growing the AUM from $1.66bn to $1.97bn and strengthening foothold in Singapore. Upon completion of the acquisition, the Singapore contribution to AUM will increase from 40.6% to 49.8% of total portfolio.

The Negatives

  • Committed occupancy of 84.2% is lower than portfolio occupancy of 93.7%. The current occupancy is 67.7% and there is an agreement in place for the two of the three tenants to ramp-up their space requirements, bringing committed occupancy to 84.2%. The remaining vacant space is the office component in the property. We expect some hurdles in securing a tenant for the office space since it resides within the data centre, and will not be able to be marketed like a typical office space.
  • Short WALE of 3.6 years for the property. The WALE includes the effect of the ramp-in in occupancy by the tenants. The WALE of the property is shorter than the existing portfolio WALE of 9.6 years as at 30 March 2018.

Upgrade to ACCUMULATE (from Neutral); higher target price of $1.51 (previously $1.47)

  • We have adjusted FY18e/FY19e DPU -10.3%/+3.1% from previous. 
  • The long-term demand drivers for data centres remain intact, but downside risk arises from the rich valuation that an implied 1.42 times FY18e P/NAV multiple.

Richard Leow CFA Phillip Securities | 2018-05-08
SGX Stock Analyst Report ACCUMULATE Upgrade NEUTRAL 1.51 Up 1.470