Keppel DC REIT - CGS-CIMB Research 2019-04-15: Delivering Steady Growth


Keppel DC REIT - Delivering Steady Growth

  • KEPPEL DC REIT (SGX:AJBU)'s 1Q19 DPU of 1.92Scts was in line at 24% of our FY19 forecasts; the 6.7% y-o-y improvement was due to contributions from acquisitions in FY18.
  • Higher gearing of 32.5% due to issuance of floating rate notes reduces debt headroom from S$335m to S$273m.
  • Maintain ADD with an unchanged DDM-based Target Price of S$1.54

1Q19 results in line due to contributions from FY18 acquisitions

  • KEPPEL DC REIT (SGX:AJBU)'s 1Q19 DPU of 1.92Scts (+6.7% y-o-y) was in line forming 24% of our FY19 forecasts. This was due to contributions from SGP5 and maincubes, which were acquired in FY18, but slightly offset by lower overseas contributions due to the depreciation of foreign currencies against the S$.
  • 1Q19 DPU improved 3.8% q-o-q largely due to the tax transparency treatment granted in 1Q19 for SGP5, this led to tax savings of c.S$0.6m in 1Q19.

Occupancy remains healthy at 93.2%, with low upcoming expiries

  • Keppel DC REIT's portfolio occupancy remained strong at 93.2% in 1Q19 while the portfolio weighted average lease expiry fell slightly to 8.0 years from 8.3 years in 4Q18 due to natural time decay of leases. Due to the low amount of upcoming expiries (2.4%/4.9% for FY19/FY20), we do not expect significant downside risk to occupancy.
  • Keppel DC REIT has also hedged forecasted foreign sourced distributions till 2H20 to enhance the stability of distributable income.

Asset enhancement at SGP3, Dub1 and Dub 2 to improve efficiency

  • During the quarter, retrofitting works were undertaken at SGP3 to make way for expansion within a client’s premises. This is scheduled to be completed in mid-2019 and would increase the returns on SGP3. Capex for the retrofitting will be borne by the tenant and the works will not result in any disruption or income vacuum.
  • Asset enhancement works at Dublin 1 to improve energy efficiency are on track for completion by 2020 while power upgrade and fit-out works at Dublin 2 are slated to be completed in 2H2019.

Gearing raised to 32.5% due to issuance of floating rate notes

  • Keppel DC REIT's gearing increased from 30.8% at end-FY18 to 32.5% as at end-1Q19 due to the issuance of a €50m 7-year floating rate notes due 2026. The current gearing implies a debt headroom of c.S$273m assuming a 40% debt ceiling. This new facility lengthened the debt tenor of Keppel DC REIT to 3.3 years (3.0 years at end-FY18) and reduced the average cost of debt to 1.7% from 1.9%.
  • Interest rate exposure is now substantially hedged with about 81% of its borrowings on fixed rates.

Maintain Add with a DDM-based Target Price of S$1.54

  • As results were broadly in line with expectations, we leave our FY19-21 DPU forecasts unchanged. We continue to like Keppel DC REIT for its pure-play exposure to the growing data centre industry and its acquisition-led growth story.
  • A key positive catalyst would be an accretive acquisition of SGP 4 while downside risk could be weaker foreign currencies.

LOCK Mun Yee CGS-CIMB Research | Ervin SEOW CGS-CIMB Research | https://research.itradecimb.com/ 2019-04-15
SGX Stock Analyst Report ADD MAINTAIN ADD 1.540 SAME 1.540