Keppel DC REIT - OCBC Investment 2019-01-23: A “Data-licious” Set Of Results


Keppel DC REIT - A “Data-licious” Set Of Results

  • Keppel DC REIT's 4Q18 DPU +5.7% y-o-y.
  • Tax transparency for KDC SGP 5.
  • Higher Fair Value of S$1.60.

4Q18 results within our expectations

  • KEPPEL DC REIT (SGX:AJBU) reported its 4Q18 results which met our expectations. Gross revenue and NPI jumped 30.5% and 30.1% y-o-y to S$48.0m and S$42.5m, respectively. DPU grew at a smaller magnitude of 5.7% y-o-y to 1.85 S cents due to a larger unit base and capex reserves set aside.
  • Keppel DC REIT recorded a revaluation gain of S$32.6m in 4Q18, driven by higher NPI assumptions used by the valuers as cap rates adopted remained largely unchanged.
  • For FY18, Keppel DC REIT’s NPI increased 26.0% to S$157.7m, while DPU rose 2.8% (+5.0% if we exclude a one-off capital distribution in FY17) to 7.32 S cents. This formed 98.8% of our forecast.

Keppel DC Singapore 5 (KDC SGP5) has upside potential

  • Keppel DC REIT said that it has been granted tax transparency treatment for its share of the taxable income from KDC SGP 5, similar to that which was granted for its three other Singapore properties.
  • KDC SGP 5 has also been ramping up faster than management’s initial expectations, with tenants seeking more space for expansion. Keppel DC REIT is thus evaluating on how to create additional white space (space allocated for IT equipment such as servers and racks) at the property, which would present further upside potential if successfully executed.

Still hunting for inorganic growth opportunities

  • Keppel DC REIT has ample debt headroom to pursue inorganic growth opportunities, given its low aggregate leverage ratio of 30.8% (3Q18: 32.0%). However, one of the limitations is the difficulty in finding meaningful deals, as cap rates in the market have compressed to ~5% in Australia, London, Germany and Amsterdam, ~6% in the U.S. and > 3% in Asian markets such as HK and Japan.
  • In terms of sponsor pipeline, we believe the potential acquisition of KDC SGP 4 is one of the lower hanging fruits, and this may take place either this year or next.
  • After incorporating this set of full-year results in our model, rolling forward our valuations and lowering our cost of equity assumption from 7.8% to 7.6% on account of Keppel DC REIT’s healthier balance sheet and more risk-on market sentiment, we derive a higher fair value estimate of S$1.60 (previously S$1.48).

Wong Teck Ching Andy CFA OCBC Investment Research | https://www.iocbc.com/ 2019-01-23
SGX Stock Analyst Report BUY MAINTAIN BUY 1.60 UP 1.480