Keppel DC REIT - DBS Research 2020-01-22: And The Music Plays On


Keppel DC REIT - And The Music Plays On

  • Keppel DC REIT's FY19 DPU of 7.61 Scts; increase of 4.0% y-o-y.
  • Three accretive acquisitions lift adjusted NAV by 8.7% to S$1.12.
  • Aggregate leverage of 30.7%; remaining debt headroom of c.S$440m.
  • AEIs at three properties expected to complete in 2H20 and boost earnings.

BUY; Target Price raised to S$2.40.

  • In FY19, KEPPEL DC REIT (SGX:AJBU)’s portfolio grew by close to S$770m with three acquisitions and M&E works. The REIT has demonstrated yet again its ability to source for third-party deals that are accretive, in addition to the Sponsor’s pipeline.
  • With income contribution from the new assets, organic growth via rental escalations, and potential of further acquisitions, we maintain our BUY call and raised our Target Price to S$2.40, presenting ~10% total return (including 3.7% yield).

FY19 DPU increased to 7.61 Scts, a 4.0% y-o-y increase.

  • Gross revenue for FY19 was S$194.8m, a 11% y-o-y increase; mainly contributed by the acquisitions of KDC SGP 4 and DC1 as well as full-year contribution from KDC SGP 5 and maincubes DC, partially offset by lower overseas contributions due to the depreciation of AUD and EUR against SGD. Property expenses declined 1.8% due to the lower repair and maintenance costs incurred in FY19 and lower overseas expenses arising from the depreciation of AUD and EUR against SGD. As a result, NPI increased 12.4% y-o-y to S$177.3m and distributable income increased 17.8% to S$113.2m.
  • During the quarter, Keppel DC REIT issued 277m additional new units to raise gross proceeds of S$478.2m for the acquisitions. As the acquisitions of the two Singapore data centres were only completed in November 2019, there was a slight drag in DPU. Despite this, DPU for FY19 increased 4.0% to 7.61 Scts.

Expect further DPU growth in coming year.

  • A combination of organic growth and full year’s contribution from KDC SGP 4 and DC1 is expected to boost earnings for FY20. Moreover, the acquisition of Kelsterbach DC in Germany that was also announced at the end of FY19, is only expected to complete in 1Q20.
  • In addition to the planned construction of Intellicentre 3 in Sydney and the M&E works at DC1, Keppel DC REIT has identified another asset enhancement. Approximately S$29.9m will be spent on KDC SGP 5 to increase the power capacity at the asset. The AEI is expected to complete in the second-half of FY20 and generate a high single-digit ROI.
  • With all the additional sources of income, coupled with the organic growth from rental escalations, we expect Keppel DC REIT’s FY20 DPU to grow by c.9%.

Increase in valuation of portfolio due to improved performance and cap rate compression.

  • On 31 December 2019, Keppel DC REIT’s portfolio was revalued with most properties carrying higher valuations despite the FX losses caused by the AUD and EUR depreciation against the SGD. Portfolio cap rates compressed marginally from a range of 5.75-10.75% to 5.50-10.25% over the year. The only properties to suffer slight revaluation losses were Basis Bay in Malaysia and GV7 in UK, mainly due to FX losses and weaker rental rates.
  • The higher portfolio valuation contributed to the slight dip in aggregate leverage to 30.7%. With the lower leverage and increased portfolio valuation, Keppel DC REIT currently has a debt headroom of c.S$440m. The debt headroom will be more than sufficient for the various AEI and construction projects, as well as for the extension of the land lease for KDC SGP 1, 2, 3 and 4 that is estimated to be c.S$20m.

Portfolio and capital markets metrics remain robust.

  • Portfolio WALE remains very healthy at 8.6 years, and only 4.2% of leases are due for renewal in FY20. As data centre tenants tend to be more “sticky”, we believe that the high tenant retention rate can be maintained. Despite the increase in total debt from the acquisitions, all-in borrowing costs remain low at 1.7%, and interest coverage ratio stands at 13.3x.

Looking ahead

  • We believe that Keppel DC REIT will remain on the acquisition path. With no suitable pipeline assets available from the Sponsor in the coming year, we firmly believe the REIT will rely on third-party acquisitions. Reaffirming its strategy, Keppel DC REIT will continue to be on the lookout for acquisitions within the Asia Pacific region and Europe.
  • Keppel DC REIT has demonstrated over the years, its ability to source for accretive third-party deals. As such, we have priced in S$300m of acquisitions in FY21, based on a debt-equity ratio of 40:60.
  • The introduction of 5G networks globally is expected to generate more mobile traffic as well as further drive digitalisation and cloud deployment. This will augment well for data centres over the next few years as the adoption of 5G networks becomes more widespread.
  • We maintain our BUY call with an increased Target Price of S$2.40. See Keppel DC REIT Share Price; Keppel DC REIT Target Price; Keppel DC REIT Analyst Reports; Keppel DC REIT Dividend History; Keppel DC REIT Announcements; Keppel DC REIT Latest News.

Derek TAN DBS Group Research | Rachel TAN DBS Research | https://www.dbsvickers.com/ 2020-01-22
SGX Stock Analyst Report BUY MAINTAIN BUY 2.40 UP 2.230