Keppel DC REIT - DBS Research 2019-01-23: Up And Away!

KEPPEL DC REIT (SGX:AJBU) | SGinvestors.io KEPPEL DC REIT (SGX:AJBU)

Keppel DC REIT - Up And Away!

  • Keppel DC REIT's FY18 operational results steady; NAV rose by 10% on the back of higher cashflows. 
  • Low gearing empowers the REIT with headroom for acquisitions. 
  • Estimates raised to reflect positive tax transparency ruling. 
  • BUY, Target Price raised to S$1.60. 


BUY, Target Price of S$1.60.

  • Trading at a yield of c.5.5% and low gearing of c.31%, KEPPEL DC REIT (SGX:AJBU) remains one of the few REITs in Singapore capable of making accretive acquisitions, supported by low cost of capital. The REIT is projected to deliver a solid 3%-5% growth in distributions, with upside from acquisitions.


Where We Differ: Our Target Price is higher than consensus.

  • Our Target Price of S$1.60 is the highest on the street. Our numbers were raised to account for the recent positive tax transparency status for its stake in KDC SGP 5.
  • In addition, the stock's conservative gearing of c.31% provides Keppel DC REIT with amble gearing capacity to fund opportunistic acquisitions.


Potential catalyst: Continued robust operational performance.

  • Keppel DC REIT's 4Q18 results were in line with expectations. With a sustained portfolio occupancy of c.93.0% and as KDC SGP 5 ramps up operationally, we are likely to see higher revenues in the medium term.
  • With limited expiries in the coming two financial years, there is high income visibility, a valued trait in the current volatile climate.


Valuation:

  • We maintain our BUY recommendation. We raised our target price to S$1.60 based on DCF.
  • Our discount rate reflects a refreshed 3.0% 10-year risk-free rate and a 50-bp increase in funding costs.


Key Risks to Our View:

  • Competition from larger third-party data centre players. The data centre market is dominated by several large international operators which have been aggressively expanding into markets where KDC REIT has a presence. KDC REIT may face higher barriers to entry and stiffer competition to attract and etain tenants.


WHAT’S NEW - Operational metrics looking up


A strong end to the year; DPU of 7.32Scts in line with estimates.

  • Keppel DC REIT reported FY18 gross rental income growth of 26.2% y-o-y to S$175.5m, mainly from the contribution of recent additions to the portfolio (maincubes Data Centre and KDC Singapore 5 acquired in 2018, and full year contribution of KDC Dublin2). This was also boosted by the appreciation of the EUR and GBP against the SGD, which partially offset the lower revenues from Basis Bay DC and Gore Hill DC, and the weak AUD vs SGD.
  • Other income of S$8.4m was S$4.0m higher y-o-y, due to rental top-ups and higher ad hoc service revenues. As a result, net property income (NPI) rose by a higher 24.6% to S$115.2m mainly on a proportionate increase in expenses (+28.0% y-o-y).
  • On a quarterly basis, 4Q18 top line and net property income came in 30.5% and 30.1% higher.
  • Distributable income to unitholders (including capex reserves) rose 16.7% y-o-y to S$96.1m in FY18. After stripping out these capex reserves and an enlarged equity base, DPU increased by a smaller 5.0% to 7.32 Scts (1.85 Scts in 4Q18, +5.7% y-o-y, flat q-o-q), coming within estimates.

NAV rose by close to 10%.

  • The portfolio reported a revaluation gain of c. S$32m, which was mainly from its Singapore datacenters largely due to higher revenues while cap rates remained stable. This more than offset some flux in asset values for its overseas datacentres.
  • NAV rose to S$1.07, which was close to 10% higher compared to a year ago.

Steady operating metrics.

  • Operational metrics generally remained stable in 4Q18 compared to a quarter ago with occupancy rates steady at 93.1% with a long weighted average lease expiry (WALE) of 8.3 years.
  • Keppel DC Singapore 5's occupancy rate reached c.84.2% (vs 73.9% in 2Q18) and has achieved its occupancy capacity for the data-centre space at the asset, with the remaining vacancy being office space which is likely to be taken up only in the medium term. We maintain our projection that Keppel DC Singapore 5 would deliver an initial yield of 7.8% when that happens from 2H19.
  • The other data centres across its portfolio are substantially leased with a long WALE and offer strong income visibility.

Development and asset upgrades to drive demand.

  • Keppel DC REIT has contracted to purchase IC3 East DV in Sydney, Australia, which is expected to be built on vacant land within the existing Intellicentre 2 Data Centre site with completion expected between 2019-2020. Upon completion, a 20-year lease will commence with Macquarie Telecom, which further enhances its income visibility and earnings upside. We have not priced in this acquisition.
  • In addition, ongoing upgrading works (power upgrading and fit-out works) at Keppel DC Dublin 1, where occupancy rate still hovers at around 55%, is expected to complete in 2020 and will also underpin more upside to earnings when completed.

Financial metrics stable.

  • Keppel DC REIT’s financial metrics remain strong, with average cost of debt stable at 1.9% with 86% of rates fixed. The REIT will be renewing 19% (or close to c.S$130m) of loans expiring in 2019. We believe there is opportunity to swap the debt into a foreign currency-denominated debt (EUR or AUD) given the REIT’s diversified earnings base, to achieve a better natural hedge position.

Early “ang-bao” from tax authorities in Singapore

  • Keppel DC REIT recently announced that Keppel DC Singapore 5 has been awarded tax transparency status, similar to its other Singapore properties, which will add to distributions from 1Q19 onwards. Our estimates are revised higher to account for this tax transparency, resulting in a higher Target Price of S$1.60.

Still looking for AUM growth.

  • Overall gearing remained low at 31%, after accounting for the revaluations for its portfolio, which empowers Keppel DC REIT to acquire more assets.
  • While not committing to an AUM target, the manager is reviewing opportunities in both new and existing markets as the REIT looks to bulk up and grow its distributions and AUM. The target in the longer term is to have 50% of its assets derived from assets from the Asia Pacific region (currently 67%).





Derek TAN DBS Group Research | Mervin SONG CFA DBS Research | https://www.dbsvickers.com/ 2019-01-23
SGX Stock Analyst Report BUY MAINTAIN BUY 1.60 UP 1.520



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