Keppel DC REIT - OCBC Investment 2019-07-25: Proving Its Mettle Over Time

KEPPEL DC REIT (SGX:AJBU)

Keppel DC REIT - Proving Its Mettle Over Time

KEPPEL DC REIT (SGX:AJBU) is the first pure-play data centre REIT listed in Asia on the main board of the Singapore Exchange. It currently owns 16 data centres (including one under development) across eight countries with an AUM of ~S$2.0b. 66.7% and 33.3% of its portfolio value comes from APAC and Europe, respectively.
We view Keppel DC REIT as a key proxy to the fast-growing data centre industry. Within the industry, the global co-location market is projected to grow by 16%-18% this year, versus an earlier forecast of 15%-17%, according to industry watcher BroadGroup.
Keppel DC REIT derived 75.4% of its rental income (for month of Jun 2019) from colocation leases. Geographically, Singapore ranks among the top data centre hubs in the world. According to projections by BroadGroup, incremental demand in Singapore is estimated to increase at a CAGR of 9.4% from ~39.5MW in 2018 to 56.5MW in 2022, outstripping supply growth (CAGR of 2.1%). 51.1% of Keppel DC REIT’s portfolio AUM is derived from Singapore.

As a recap, we had recently lowered our cost of equity assumption on Keppel DC REIT and bumped up our fair value to S$1.93 for a number of reasons.
Firstly, we highlighted that while Keppel DC REIT does not have a long listing history (IPO in Dec 2014), we believe it has increasingly been establishing a good track record in DPU growth and acquisitions. Its DPU has grown at a CAGR of 4.0% from FY15 to FY18, and we expect further growth of 7.3% in FY19F and 4.6% in FY20F.
The acquisition of Keppel DC Singapore 3 in Jan 2017 is one good example of management’s value creation via inorganic growth. Although funded by an equity fund raising exercise, Keppel DC REIT managed to boost its pro forma DPU and NAV/unit by 10.4% and 4.3% (with tax transparency granted), respectively, while lowering its aggregate leverage at that time from 36.1% to 27.7%.
Secondly, Keppel DC REIT has always adopted a prudent capital management approach. Aggregate leverage of 31.9% (as at 30 Jun 2019) is healthy and leaves ample debt headroom to drive acquisitions ahead. Management has also put in place a proper risk management strategy (foreign sourced distributions till 2H20 hedged and 80% of its loans hedged).
Thirdly, we view Keppel DC REIT as a defensive and unique REIT with ‘sticky’ client relationships and a long portfolio WALE of 7.8 years, which is one of the longest in the S-REITs sector

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2019-07-25

SGX Stock Analyst Report BUY MAINTAIN BUY 1.930 SAME 1.930