Keppel DC REIT - CGS-CIMB Research 2021-04-26: Investing In An SPV To Be Established By M1

KEPPEL DC REIT (SGX:AJBU)

Keppel DC REIT - Investing In An SPV To Be Established By M1

Keppel DC REIT entered into a non-binding term sheet to invest in debt securities and preferential shares of a SPV owned by M1.
In return, Keppel DC REIT will receive S$11m p.a. for 15 years, which is an average annual return of ~6% (before transaction and other related costs).
Reiterate HOLD. Keppel DC REIT's share price is trading at < 4% yield vs industrial REIT’s average of > 5%.

M1 and Keppel DC REIT (SGX:AJBU) have signed a non-binding term sheet with the intention to enter into definitive agreements, with respect to a proposed investment by Keppel DC REIT into a SPV that will be established by M1.
The SPV will acquire the network assets from M1 at a cash consideration of ~S$580m, equivalent to the net book value of network assets as at end-Feb 2021.
The consideration will be funded by the SPV via external financing of S$493m and Keppel DC REIT’s investment of ~S$87m in return for debt securities and preference shares in the SPV.
At the same time, Keppel DC REIT will be expanding its investment mandate into real estate and assets in the digital connectivity sector.

The proposed investment is still at a preliminary stage, with due diligence and relevant approvals still pending.
Based on our understanding, Keppel DC REIT will receive S$11m p.a. (comprising principal and interest) for 15 years from the investment. Based on Keppel DC REIT’s investment cost, this works out to be 89% in total return, or an average return of 6% p.a., assuming this will be funded internally and before any transaction-related cost/fees. There are no further capex/investment requirements as per this agreement.

We think that the investment provides stable (as the assets are needed to support M1’s business) good returns to Keppel DC REIT, which is in line with the returns of its past data centre acquisitions of about 3-6%.
Keppel DC REIT intends to distribute all returns from this investment to shareholders.
Notwithstanding its investment into debt securities, Keppel DC REIT’s focus remains on data centre space, and it does not intend to invest substantially in securities that are subject to regulatory limits.
The wider mandate will allow Keppel DC REIT to look at other digital network assets and bundled data centre–digital network assets, rather than just pure data centres. This would widen its acquisition opportunities and strengthen its inorganic growth, especially when cap rates of data centres have been compressed since the pandemic.
On Keppel Corp (SGX:BN4) front, the exercise is positive to the group as M1 could unlock the value of the assets and redeploy the proceeds into new businesses or pare down debt.

We maintain our FY21-23 DPU forecasts for Keppel DC REIT pending more details such as transaction fees/cost. We had previously factored in S$300m worth of acquisition for Keppel DC REIT in FY21F.
See
We reiterate HOLD on Keppel DC REIT at an unchanged target price of S$2.86.
Keppel DC REIT's share price is trading at < 4% DPU yield (vs. industrial REIT average of > 5%).

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2021-04-26

SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.860 SAME 2.860