Keppel DC REIT - CGS-CIMB Research 2020-01-21: Acquisition Growth Continuing


Keppel DC REIT - Acquisition Growth Continuing

  • KEPPEL DC REIT (SGX:AJBU)'s 4Q/FY19 DPU of 1.83/7.61 Scts (-1.1%/+4.0% y-o-y) was in line at 23%/97% of our FY19 estimate due to the SGP4 and DC1 acquisitions in 2019. See Keppel DC REIT Announcements.
  • Keppel DC REIT acquired a data centre in Kelsterbach, Germany for €81.8m which would be leased on a triple-net basis until end-2025.
  • Maintain our HOLD call with a higher DDM-based Target Price as we include its latest acquisitions. See Keppel DC REIT Target Price.

FY19 results in line at 97% of our/consensus estimates

  • Keppel DC REIT's 4Q/FY19 DPU of 1.83/7.61 Scts (-1.1%/+4.0% y-o-y) was in line with our FY19 estimate. This was due to an 11% y-o-y increase in gross revenue from the acquisitions of SGP4, DC1 and full-year contributions from SGP5 and the maincubes data centre, but partially offset by lower overseas contributions due to the depreciation of the A$ and € against the S$. See Keppel DC REIT Dividend History.
  • FY19 NPI margins improved y-o-y to 91% due to lower repair and maintenance expenses.

Acquisition momentum continues with Kelsterbach acquisition

  • In 4Q19, Keppel DC REIT announced the acquisition of a 540,869 sqft data centre in Kelsterbach, Germany for €81.8m (S$125.3m). The shell and core data centre is Keppel DC REIT’s second data centre in Germany and will be its largest data centre in its portfolio by lettable area. The property is leased on a triple-net basis until end-2025. The acquisition is likely to be fully debt funded according to Keppel DC REIT and is expected to be completed in 2020.

Occupancy remains healthy at 94.9%

  • Portfolio occupancy was higher at 94.9% and WALE was longer at 8.6 years due to the impact of new acquisitions. Upcoming expiries in FY20/FY21 remain low at 4.2%/10.7%. Keppel DC REIT reported slight compression in the cap rates used for its asset valuations from 5.75-10.75% in FY18 to 5.50-10.25% in FY19.

Keeping aggregate leverage low despite acquisitions

  • Keppel DC REIT’s aggregate leverage inched up to 30.7% from 28.9% last quarter as a result of the latest acquisitions of SGP4 and DC1. Average cost of debt remained at 1.7% while debt tenor was 3.9 years. As of Dec-2019, Keppel DC REIT had 4.2%/14.2% of debt maturing in 2020/2021, respectively.
  • According to Keppel DC REIT, it has debt headroom of > S$400m before reaching its internal 40% gearing limit; this would be used for asset enhancements at SGP5 (S$29.9m) and DC1 (S$56.6m) to optimise portfolio returns.

Maintain HOLD with a higher target price.

  • Our Target Price is increased due to a 4.6-8.5% increase in FY20-21F DPU estimates as we incorporate the impact of the Kelsterbach acquisition, the supplemental deed in relation to DC1 and update for FY19 results. See Keppel DC REIT Target Price. We continue to view the data centre industry positively due to its future-ready characteristics and limited supply; however, we think that current valuations (4.2% FY20F yield and 2.0x P/B) are steep ( > +2 s.d. above historical mean).
  • Positive catalysts include additional accretive acquisitions while a key risk could be weaker foreign currencies. See Keppel DC REIT Analyst Reports; Keppel DC REIT Latest News.

LOCK Mun Yee CGS-CIMB Research | Ervin SEOW CGS-CIMB Research | https://www.cgs-cimb.com 2020-01-21
SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.03 UP 1.880