Keppel DC REIT - Phillip Securities 2019-01-23: A Good Close To The Year

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

Keppel DC REIT - A Good Close To The Year

  • KEPPEL DC REIT (SGX:AJBU)'s 4Q18 revenue and DPU were in line with expectations.
  • DPU growth was fuelled by portfolio expansion.
  • Maintain ACCUMULATE; new target price of $1.52 (previously $1.45).



The Positives


Operationally stable.

  • Portfolio occupancy remained unchanged q-o-q at 93.1%. There were no lease expiries in 4Q 2018. Portfolio weighted average lease expiry (WALE) of 8.3 years (by net leasable area) is the longest among industrial S-REITs (sector median: 3.6 years, as at Sept. 2018).

Stable and predictable cash flow due to limited renewal risk until 2020 and hedging of foreign-sourced distributions.

  • Only 2.7% and 4.7% of leased area are up for renewal in 2019 and 2020 respectively. The Manager did not specify which assets these expiries are coming from, other than being from the co-location assets. Foreign-sourced distributions have been hedged till 1H 2020, thus giving visibility to foreign income.

S$32.6mn revaluation gain.

  • The Manager commented that the capitalisation rate for the portfolio remained largely unchanged. The revaluation gain was mainly due to slightly higher income assumption. The revaluation gain is only < 2% of AUM.

Low aggregate leverage of 30.8% and limited interest rate exposure.

  • We estimate debt headroom of S$320mn (assuming 40% target gearing), which can be used to grow the existing AUM of S$2bn by 16%. 86% of debt has been hedged on fixed-rate.


The Negatives


Basis Bay Data Centre in Cyberjaya remains under-utilised.

  • Occupancy has been at 63.1% for seven consecutive quarters (originally 100%). The Manager commented that response for the property has been quite weak and has also been affected by fresh political uncertainty.


Outlook

  • The outlook is positive. Data centre demand remains robust, underpinned by increasing cloud adoption, rapid digital transformation, data centre outsourcing and data sovereignty regulations.
  • The Manager achieved the S$2bn AUM target set for 2018 but does not have a new target for 2019. The Manager articulated that it intends to maintain the pace of acquisitions. However, we think the pace could be hampered by tightening capitalisation rates.
  • The Manager commented on the difficulty in finding assets to buy with a limited deal flow, as owners are holding on and not willing to sell. The asking capitalisation rate for those prepared to sell are very tight.


Maintain ACCUMULATE; new target price of $1.52 (previously $1.45)

  • While the long-term demand drivers for data centre remains intact, downside risk may arise from the rich valuation with the implied 1.37 times FY19e P/NAV multiple.


Relative valuation

  • KEPPEL DC REIT (SGX:AJBU) trades at a higher P/NAV multiple compared to other listed S-REITs. We believe this is a reflection of the burgeoning demand for the unique asset class of data centres.





Richard LEOW CFA Phillip Securities Research | https://www.stocksbnb.com/ 2019-01-23
SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 1.52 UP 1.450



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