Keppel DC REIT - CGS-CIMB Research 2021-07-27: Inorganic Growth To Underpin 2H FY21


Keppel DC REIT - Inorganic Growth To Underpin 2H FY21

  • Keppel DC REIT's 1HFY21 DPU of S$0.04924 is below expectations at 47% of our FY21F.
  • Has announced its first acquisition (with ROFR for 5 other assets) in China.
  • DPU yield now palatable, acquisitions could gather pace. Upgrade Keppel DC REIT to ADD.

Keppel DC REIT reported stronger 1HFY21 due to acquisitions and AEIs

  • Keppel DC REIT (SGX:AJBU)’s 1H21 DPU of S$0.04924 (+12.5% y-o-y) missed expectations at 47.1% of our FY21 forecast due to slower-than-expected acquisition pace. We expect a stronger 2H21F, driven by new acquisitions, asset enhancement initiatives (AEIs) and development completion.
  • Keppel DC REIT's 1H21 revenue rose 9% y-o-y to S$135.1m, while NPI rose 8.4% y-o-y to S$123.8m. The strong set of results was mainly due to
    1. the acquisitions of Kelsterbach (completed in May 2020) and Amsterdam data centre (Dec 2020); and
    2. completion of AEI works at Keppel DC Singapore 5 and Keppel DC Dublin 1 in 2H20, and Keppel DC Dublin 2 and DC 1 in 1Q21.
  • Keppel DC REIT's portfolio occupancy improved slightly from 97.8% in 1Q21 to 98% with a long WALE of 4.9 years by gross rental income (GRI). Following the signing of some lease renewals in Jul, it now has just 0.8% of its leases (by GRI) remaining for renewal in 2021F, due to strong leasing momentum. Rental reversion in 1H21 was stable.

Announced its first acquisition in China

  • In Jul, Keppel DC REIT acquired its first data centre in China – Guangdong Data Centre in Jiangmen, Guangdong – for S$132m, which represents a 7.8% discount to its independent market valuation and an acquisition yield of high 8%. The acquisition will be funded by debt and equity. DPU accretion is 1.9%, based on pro forma numbers, according to Keppel DC REIT.
  • The facility is the first of six data centre buildings to be completed in the Bluesea Intelligence Valley Mega Data Centre Campus. The seven-storey fully-fitted facility will be fully leased back to vendor on a triple net basis for 15 years. Under the agreement, Keppel DC REIT will have the right of first refusal (ROFR) to acquire the other five data centres within the campus (currently being fitted out).
  • Year-to-date Keppel DC REIT has made S$267m worth of acquisitions vs our full year assumption of S$300m. An EGM for its investment in a special purpose vehicle (SPV) with M1 will be held later this year.
  • While global data centre cap rates (range from 4% to 6%) have compressed, it still sees acquisition opportunities but will remain selective.
  • Meanwhile, development of its IC3 in Sydney was completed on 13 Jul; this marked the commencement of a 20-year triple net master lease with Macquarie Data Centres. Keppel DC REIT also granted iseek the option to purchase 100% of iseek DC in Brisbane for S$35.3m. This is in line with its strategy to review and consider divestments to optimise its portfolio returns.

Upgrade Keppel DC REIT to ADD, with a lower DDM-based target price of S$2.84

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2021-07-27
SGX Stock Analyst Report ADD UPGRADE HOLD 2.84 SAME 2.860