Keppel DC REIT - Phillip Securities 2019-07-18: Stopped Out By Rich Valuations 


Keppel DC REIT - Stopped Out By Rich Valuations 

  • Revenue and DPU in line with our forecast. KEPPEL DC REIT (SGX:AJBU)'s 2Q19/1H19 DPU of 1.93/3.85 Scts (+6.0%/+6.4% y-o-y) account for 24/48% of our FY19 DPU forecast.
  • Potential acquisition of KDC SG 4 and repositioning of office space at KDC SG 5 from office to DC are catalysts for Keppel DC REIT.
  • Downgrade to HOLD with a higher target price of $1.71 (previously $1.59) to reflect better operational performance post-AEI, but downgrade Keppel DC REIT due to rich valuations.

The Positives

Operating statistics remain healthy.

  • Long WALE of 7.8 years and portfolio occupancy of 93.2% provide income visibility. Conservative gearing of 31.9% affords Keppel DC REIT a c.S$270m headroom, further sweetened by the REIT’s low cost of borrowing at 1.7%.

Ongoing AEIs to lift revenues.

  • Retrofitting works at KDC SG 3 to increase client’s wattage will utilise extra power on hand and increase revenues.
  • Power upgrade and fit-out for client expansion will bring occupancy at KDC Dublin 2 from 90.7% to 100% and on track to be completed in September 2019.
  • AEI to improve energy efficiency at Keppel DC Dublin 1 (occupancy 61.8%) has drawn more interest to the asset.

The Negatives

Search for accretive acquisitions remains challenging.

  • KDC SG 4 remains the most likely acquisition. However, it is not at the stage of stabilisation where the REIT is willing to acquire it. The much-awaited acquisition of KDC SG 4 seems to be headed for a 4Q19 delivery.


  • Keppel DC REIT is working on converting the office space (16% of the NLA) at KDC SG 5 into a DC. The management is in the process of getting the required approvals to bringing more power onsite, and well as securing customer commitments in advance.
  • Demand for DCs remains strong and the supply coming onto the markets that Keppel DC REIT has a presence in is expected to slow. In Singapore, a slowdown in DC approvals is likely as the government attempts to strike a balance between its pledge to reduce carbon emissions and the importance of DCs within the economic infrastructure.
  • Lack of supporting infrastructure (substations) in Dublin is the kink in the pipe. It increases the cost of building new DCs as the developers will have to incur the cost of building the supporting infrastructure.
  • Lack of supply coming onto the market will help to push rents up. However, we note that only a small percentage of leases will expire in 2019/2020 (2.4%/4.9%), as such, the uplift from increasing rents will not be as pronounced. A more significant 16.3% of rents will expire in 2021.

Downgrade to HOLD with a higher target price of $1.71 (previously $1.59)

  • We refine our forecast to reflect the better occupancy and higher rents from Keppel DC REIT’s initiatives to improve asset efficiency.
  • We downgrade Keppel DC REIT to HOLD as we believe current valuation of 1.6x P/NAV, at the +2s.d level, are rich.

Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2019-07-18
SGX Stock Analyst Report HOLD DOWNGRADE ACCUMULATE 1.71 UP 1.590