Keppel DC REIT - DBS Research 2018-08-08: Building Blocks For A Brighter Future

KEPPEL DC REIT SGX:AJBU

Keppel DC REIT - Building Blocks For A Brighter Future

Keppel DC REIT enters into an agreement with Macquarie Telecom for a new shell and core data centre in Sydney.
Funding and new 20-year triple-net master lease for both IC2 DC and IC3 East DC facilities to kick in upon completion in 2019/2020.
FY20F NPI and DPU will increase by 1.4% and 0.9%, respectively.

Maintain BUY with Target Price of S$1.52; we have yet to adjust our estimates given the transaction’s long completion date.

Keppel DC REIT (KDCREIT) announced that it has entered into an agreement with Macquarie Telecom to construct a new shell and core data centre on a piece of vacant land within its existing Intellicentre 2 Data Centre (IC2 DC) site in Sydney.

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Upon completion, Intellicentre 3 East Data Centre (IC3 East DC) will potentially feature net lettable area (NLA) of at least 86,000 sqft.
While construction cost is estimated to range between A$26-36m, the final price payable to Macquarie Telecom upon completion (between 2019-2020) will be based on specifications.

The REIT manager believes that Sydney will be a strategic market for KDCREIT. Industry sources also point to strong growth potential - 451 Research estimates Sydney’s data centre market to grow at a compound annual growth rate of 10% through 2021.

A new 20-year triple-net master lease with Macquarie Telecom for both IC2 DC and IC3 East DC shell and core buildings will commence upon completion. Initial yield is estimated at c 7.3% with built-in escalations and renewal options.
Given the long lease expiry, KDCREIT’s proforma Weighted Average Lease Expiry (WALE) as at 30 Jun 2018 is expected to increase from 8.8 years to 9.9 years. The aggregate lettable areaof KDCREIT will increase by 7.7% to c.1,198,103 sq ft.

Maintain BUY with Target Price of S$1.52. We are positive on this transaction as it continues to demonstrate the REIT’s commitment towards growth and strength in value creation.
Assuming the asset is 100% funded by debt, we estimate that the new facility could lift FY20F net property income and DPU by 1.4% and 0.9% to S$161.9m and 7.82 Scts, respectively.
Given the long completion date, we have yet to factor this into our forecast.

Derek TAN DBS Group Research Research | https://www.dbsvickers.com/ 2018-08-08

SGX Stock Analyst Report BUY Maintain BUY 1.520 Same 1.520