Keppel DC REIT - Phillip Securities 2021-04-22: Harvest Time

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KEPPEL DC REIT (SGX:AJBU)

Keppel DC REIT - Harvest Time

• Keppel DC REIT (SGX:AJBU)'s 1Q21 DPU of S$0.0246, up 18.1% y-o-y, was in line, at 25.0% of our estimate.
• Earnings improved following acquisition of Amsterdam DC and completed AEIs at DC1 and KDC Dub 2.
• Maintain ACCUMULATE and DDM-based target price of S$3.20 (COE 5.75%). Our target price for Keppel DC REIT includes S$500mn of acquisition assumptions for FY21.

Keppel DC REIT Provided Key Business & Operation Updates For 1Q21

• See Keppel DC REIT's announcements.

The Positives

Keppel DC REIT's 1Q21 NPI and DPU grew 10.0% and 18.1% y-o-y respectively.

• This was led by Kelsterbach DC in Germany acquired on 1 May 2020 and Amsterdam DC acquired on 24 Dec 2020.
• There were also contributions from completed AEIs at DC1 and Dub 2. At DC1, Keppel DC REIT converted two floors from shell & core to fully-fitted space. At Dub 2, additional IT power was brought on upon full commitment by tenants.

Practical completion or Intellicentre 3; 20-year lease signed.

• Intellicentre 3 in Sydney Australia achieve practical completion in 1Q21. It is on track for completion in 1H21. Keppel DC REIT has signed a 20-year triple net master lease with Macquarie Data Centres for Intellicentre 2 and Intellicentre 3. This will commence upon completion of the development.

The Negative

Keppel DC REIT's gearing inched up q-o-q from 36.2% to 37.2%.

• This followed debt drawn for AEI payments. As Keppel DC REIT values its properties on an annual basis, valuation uplift from its completed AEIs has not yet been reflected in its books. This implies gearing may be slightly overstated.
• Nonetheless, gearing still well under the 50% regulatory limit and is backed by Keppel DC REIT’s high interest coverage of 13.1x and high-quality tenants.

Outlook

Demand-supply gap to push up market rents.

• About 27.9% of its leases by GRI or 6.9% of NLA will expire in 2021. Most of the leases will be from Singapore and Malaysia colocation assets, which have shorter WALEs of 1.2-1.8 years.
• Singapore is Keppel DC REIT’s core market, accounting for 56% of its AUM. Given the moratorium on data centres in Singapore, there is a strong likelihood that market rents will be bid up in the coming two years, coinciding with its lease expiries.
• While Keppel DC REIT has not started engaging tenants in renewal negotiations, Data Centres’ tenant stickiness and limited alternatives imply potentially high retention rates for Keppel DC REIT.

Competition for assets compressing cap rates.

• Keppel DC REIT is still evaluating acquisitions. It was previously studying several piecemeal and portfolio acquisitions with cap rates of 5-7%. It now shares that cap rates have been compressed by 50-75bps y-o-y, with some deals coming in at sub-5% yields.

Maintain ACCUMULATE and DDM-based target price of S$3.20

• No change in our estimates. Our target price fo Keppel DC REIT assumes S$500mn worth of acquisitions in 4Q21 (NPI yields 6% and LTV 30%). We are forecasting FY21e/22e DPU yields of 3.7% and 4.2%.
• Keppel DC REIT's share price is trading at 2.2x P/B.
• Dividend yield spread of 188bps is close to its 5-year average of 200bps. This is attractive against its 2019/20 average yield spread of 100bps.
• 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.
• Stock catalysts are expected from acquisitions and higher 5G, smartphone and cloud adoption.

Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2021-04-22

SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 3.200 SAME 3.200