Keppel DC REIT - CGS-CIMB Research 2020-03-18: A Safe Haven; Data Centre REIT Commands A Premium


Keppel DC REIT - A Safe Haven; Data Centre REIT Commands A Premium

  • Recent price weakness an opportunity to accumulate. Upgrade to ADD.
  • Visible earnings growth in 2020F/2021F, driven by acquisitions and AEWs.
  • Low income risk. Long WALE of 8.6 years; forex hedged until 1H 2021.

Upgrade from Hold to ADD; premium valuation justifiable

  • Keppel DC REIT's share price has declined 26% in the past month. We believe this presents a long awaited opportunity to gain access to the only pure data centre REIT in Singapore. We think Keppel DC REIT's share price will be supported by its resilient business model and ability to make accretive acquisitions which will further spur DPU growth, and in turn valuation.
  • Upgrade Keppel DC REIT (SGX:AJBU) to ADD, with a DDM- based Target Price of S$2.17 (~23% total return) (6.9% COE, 2.4% LTG).
  • Downside risks include non-renewal of leases.
  • Accretive acquisitions are a potential re-rating catalyst.

High earnings growth visibility in the next 2 years

  • Despite the economic uncertainties, we see visible earnings growth for Keppel DC REIT in 2020F and 2021F. We expect Keppel DC REIT to deliver strong DPU growth of 23% in FY20F and 7.5% in FY21F, giving it one of the strongest DPU growth in FY20-21F among SREITs; this should help it buffer any impact from an economic slowdown.
  • The full-year impact of the acquisitions of DC 1 and Keppel DC Singapore 4 will be felt in 2020. The acquisition of Kelsterbach Data Centre in Germany will also be completed in 2020.
  • In addition, we estimate that the completion of Keppel DC REIT’s ongoing asset enhancement works (AEWs) at DC1 (to be completed in 3Q20), SGP5 (2H20), IC3 (4Q20) and Dublin 1 (1H20) would also help to boost our FY20-21 DPU forecasts by 1-3%.

Any acquisition will likely be accretive

  • Keppel DC REIT’s gearing of 30.7% (as at end-Dec 2019) is one of the lowest among the SREITs under our coverage. The completion of the Kelsterbach Data Centre acquisition in 2020F will further raise its gearing to 35% which is the sector average.
  • Given its healthy gearing, coupled with its low cost of capital, we believe any acquisition that it makes is likely to be accretive. This is more so given the low interest rate environment.
  • Based on its track record, Keppel DC REIT has been acquiring assets at a cap rate of > 6.5%.

Low income risk

Data centre REIT commands a premium

  • Keppel DC REIT is currently trading at 1.6 P/BV (down from about 2x P/BV a month ago), and 5% FY20 DPU yield. While it is the most expensive REIT in Singapore under our coverage, we think this is justifiable given its pure exposure to data centres.
  • From our checks, we note that data centre REITs in the US are also trading at a premium vs. the country's other REITs. This, we believe, is due to the supply demand gap of the sector globally.
  • According to a new report by Technavio, the global data centre market size is poised to grow by US$284.4bn or at a CAGR of more than 17% over 2019-2023, driven by the rise in adoption of multi-cloud and network upgrades to support 5G.

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CFA CGS-CIMB Research | 2020-03-18
SGX Stock Analyst Report BUY UPGRADE HOLD 2.170 SAME 2.170