Keppel DC REIT - DBS Research 2020-07-22: Demand For More Bandwidth

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KEPPEL DC REIT (SGX:AJBU)

Keppel DC REIT - Demand For More Bandwidth

• Acquisitions on the horizon as travel restrictions are gradually lifted.
• Keppel DC REIT's DPU increased 13.6% y-o-y to 4.375 Scts in 1H20.
• Strong income visibility as operations unfazed by COVID-19 pandemic.
• We have raised our target price on Keppel DC REIT to reflect current market conditions and factor in improved efficiency of properties.

Keppel DC REIT's operation highlights – Robust DPU growth of 13.6% y-o-y

• Keppel DC REIT (SGX:AJBU)'s distributable income increased 38.0% y-o-y to S$75m in 1H20 mainly due to acquisitions of three assets - Kelsterbach Data Centre (Germany), Keppel DC Singapore 4 and DC1. See Keppel DC REIT Announcements.
• Keppel DC REIT's 2Q20 DPU increased 9.8% q-o-q to 2.29 Scts due mainly to tax transparency status for Keppel DC Singapore 4 that was obtained in May 2020.
• Property tax rebates from the Singapore government will be fully passed on to tenants.
  • No need for any further rent waivers/rebates as none of Keppel DC REIT’s tenants qualify for the mandated SME rebates.
• Land lease for Keppel DC Singapore 4 has been extended by 30 years to 2050.
  • Paid land lease extension premium of c.S$5m.
  • Land lease extension for Keppel DC Singapore 2 and 3 (due to expire in FY21 and FY22 respectively) are expected to cost the same i.e. S$5m each for a 30-year extension.

Capital management – Debt headroom in excess of S$950m

• Aggregate leverage of 34.5% with low all-in cost of debt of 1.7%.
• Heathy debt tenure of 3.7 years and interest coverage ratio of 12.8x.
• Negligible refinancing risks as only 1.2% of loans are due to expire during the rest of FY20.
  • 4.9% of expiring EUR loans have been refinanced to FY24.
  • Remaining 1.2% of AUD debt due to expire in 3Q20 will be refinanced to FY24.
  • Expect all-in cost of borrowings to be maintained even with refinancing.
• Debt headroom of more than S$950m before gearing hits the regulatory limit of 50%.
  • Based on Keppel DC REIT’s internal leverage threshold of 40%, debt headroom remains robust at more than S$280m.

Portfolio update – S$2.8m in tax savings per annum

• Keppel DC REIT's portfolio occupancy increased 1.4 ppt q-o-q to 96.1%.
• Only 2.6% of leases are due to expire for the rest of FY20.
• Tax transparency treatment for Keppel DC Singapore 4 has been obtained.
  • Translating to an annual savings of c.$2.8m in taxes per year.
  • Land lease has been extended to 30 June 2050.
• Delays in AEIs and development projects expected due to COVID-19 outbreak.
  • Intellicentre 3 construction has been ongoing throughout the pandemic, but completion date delayed to 1H21 due to disruption to supply chain.
  • AEIs to increase power capacity at Keppel DC Singapore 5 and DC 1 have been delayed due to suspension of work; uncertain when the Singapore government will allow foreign workers living in dormitories to resume work.
  • AEI works to improve power efficiency and capacity at Keppel DC Dublin 1 has resumed and expected to be completed in 2H20.
• The additional power capacity that will be added to Keppel DC Singapore 5 has been fully committed (S$29.9m AEI was expected to complete in 2H20 originally).
• A EUR$12m conversion of additional space at Keppel DC Dublin 2 into a data hall has commenced; expected completion in 1H21.

Looking ahead – Resumption of growth plans

• Keppel DC REIT expects acquisitions to resume as travel restrictions are gradually lifted.
  • Many of these acquisitions have already been in the works before the COVID-19 outbreak; hoping to complete as early as 3Q20.
  • Acquisitions in FY20 are likely to be overseas from third parties.
• Pipeline acquisitions from its Sponsor likely to happen in FY21.
• Cap rates in certain markets may have compressed due to increased liquidity in the market; cap rates range anywhere from 4 – 7%.
• Willing to consider acquisitions at lower yields (sub-4%) if the asset provides long-term income stability and potential for future upside.
• Target funding structure for acquisitions remains at 70% equity: 30% debt; to maintain portfolio leverage.

Our views

We remain optimistic on Keppel DC REIT as its operations and earnings remain unfazed by the ongoing COVID-19 pandemic.

• Despite delays to acquisitions, we are confident that Keppel DC REIT will be able to deliver on its planned acquisitions in FY20. As such, we are maintaining our acquisition projection of c.S$600m for FY20.
• The in-built rental escalations of leases in its portfolio, coupled with the addition of three assets will drive organic earnings growth. AEI works at several of its properties that are expected to be completed by late-FY20 or early-FY21 will lead to further earnings upside.
• Upcoming acquisitions on the horizon as travel restrictions are eased gradually. Keppel DC REIT’s ability to deliver accretive acquisitions will be boosted by its very low WACC (Keppel DC REIT's share price currently at historical high of S$2.75).
• Despite the growth drivers in place for Keppel DC REIT, we maintain our HOLD recommendation albeit a higher target price of S$2.80.
• 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.
• Trading at a historical high share price of S$2.75, our DCF-based Target Price implies a 2% upside.

Dale LAI DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-07-22

SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.80 UP 2.550