Keppel DC REIT - CGS-CIMB Research 2019-09-16: SGP4 Comes In With 1-Net Tagging Along


Keppel DC REIT - SGP4 Comes In With 1-Net Tagging Along

  • Keppel DC REIT announced the proposed acquisitions of 99% of KDC SGP 4 and 1-Net North DC for a total agreed value of S$585.1m.
  • The transactions will be funded by a mix of equity fund raising (EFR) of c.S$473.8m, debt and issue of acquisition fee units.
  • We maintain our Hold call with a higher Target Price of S$1.82.

DPU- and NAV-accretive transactions to boost AUM by 30.7%

  • KEPPEL DC REIT (SGX:AJBU) announced the acquisitions of a 99% interest in KDC SGP 4 (SGP4) and 1- Net North DC at a total agreed value of S$585.1m. According to Keppel DC REIT management, the transactions are DPU- and NAV- accretive (+9.4% and +9.3% respectively) based on the pro-forma financials, assuming tax transparency is not granted.
  • The transactions will increase Keppel DC REIT’s AUM by 30.7% to S$2.58bn comprising 17 data centres globally. Keppel DC REIT expects both acquisitions to be completed in 4Q19.
  • See Keppel DC REIT's announcements.

Positive on the transactions from multiple angles

  • Apart from the accretion, we think the deal is positive due to the higher exposure to Singapore (63% of AUM post-completion vs. 51% pre-completion). This deal also improves the portfolio’s occupancy rate from 93.2% to 94.1% and portfolio WALE from 7.8 years to 8.9 years. The deal would also lower gearing from 31.9% to 30.3%.

SGP 4 coming in as expected; 1-Net was a positive surprise

  • SGP 4 is a colocation facility with a net lettable area (NLA) of c.84,544 sq ft and has an occupancy rate of 92.0%. It has a weighted average lease expiry (WALE) of 3.0 years. As part of the SGP 4 deal, the Vendor will provide rental support of up to S$8.8m (for 100% share).
  • 1-Net North DC has c.213,815 sq ft of floor area and is 100% committed on a triple-net master lease with 16.8 years left and renewal option for 7.6 years. SGP 4 has a stabilised yield of 7.5% while 1-Net North DC has a 9% yield according to Keppel DC REIT.

Funding structure

  • The acquisition cost of S$599.5m will be funded by EFR, debt and the issue of acquisition fee units. The equity fund raising to raise gross proceeds of c.S$473.8m comprises
    1. a private placement of 135m new units to raise S$229.9m-235.4m at an issue price of S$1.703-1.744 per unit, and
    2. a preferential offering to raise S$238.4m- 243.9m at an issue price of S$1.67-1.71, implying a 4.4-6.6% discount to VWAP.
  • The funding structure roughly implies an 80:20 equity-to-debt ratio.

Maintain HOLD with a higher Target Price of S$1.82

  • Maintain HOLD. We raise our FY20-21 DPU by 8.3-7.5% to incorporate the impact of the deal which lifts our DDM-based Target Price to S$1.82, assuming tax transparency is not granted.
  • With Keppel DC REIT trading at 1.7x FY19F P/BV, highest amongst S-REITs, we think investors should look to participate in the private placement or preferential offering for a better entry price.
  • Downside risks include weaker foreign currencies and potential income uld SGP 4 not stabilise after the 24-month rental support period.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | 2019-09-16
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.82 UP 1.670