Keppel DC REIT - OCBC Investment 2021-10-19: Still Primed For Growth


Keppel DC REIT - Still Primed For Growth

  • More favourable entry point following share price underperformance.
  • Stepping up its acquisition activities.
  • Trim Keppel DC REIT's fair value to S$3.15.

More favourable entry point with year-to-date share price underperformance

  • Keppel DC REIT (SGX:AJBU) has seen total returns of -6.9% over the past three months and -11.8% year-to-date, underperforming the FTSE Straits Times REIT Index’s -2.0% and +4.8% total returns during the same period, respectively.
  • Besides the broader rotation to cyclicals and value stocks and recent softening in share prices of global REITs due to the spike in 10-year US Treasury yield, we believe Keppel DC REIT’s recent proposal to acquire its maiden data centre facility in Guangdong, China, might have caused some cautiousness among investors given the regulatory uncertainties in China.
  • Since Keppel DC REIT also has a right-of-first-refusal on another five data centres in Guangdong from the same vendor it is buying this data centre from, this could have raised questions on how aggressively Keppel DC REIT is intending to scale up its presence in China. To mitigate this, the data centre which Keppel DC REIT is proposing to acquire comes with a long triple-net lease and KDCREIT will also not have access to the data held within the servers (mitigates data privacy concerns).
  • Following this correction and taking into account our revised forecasts (elaborated below), Keppel DC REIT is trading at FY22F distribution yield of 4.2% (as at 18 Oct 2021 close), which is close to its 3-year average of 4.3%.

Inorganic growth activities picking up

  • Although Keppel DC REIT carried out a pre-emptive equity fund raising exercise in Aug, it subsequently announced on 6 Sep the acquisition of a freehold property with two data centre buildings in Eindhoven, the Netherlands, for EUR37.2m (~S$59.9m). This acquisition comprises two shell and core data centre buildings and a warehouse and ancillary office building within the site, has a long WALE of 8.5 years by rental income, and comes with an initial NPI yield of ~5.7%.
  • Keppel DC REIT also finalised an agreement to invest S$89.7m into bonds and preference shares to be issued by NetCo, a newly incorporated unit of M1. In return, Keppel DC REIT will receive S$11m (comprising both principal and interest) each year for 15 years without assuming any operational and management risks.
  • Although some investors would have preferred Keppel DC REIT to focus solely on data centre assets, we believe the stability of income from this investment, expected positive DPU accretion and relatively small capital outlay relative to Keppel DC REIT’s asset size makes this transaction worthwhile.

Fair value lowered slightly to S$3.15

ESG Updates for Keppel DC REIT

  • Keppel DC REIT has adopted strong compliance mechanisms such as employee trainings and audits of ethics standards. The former includes training and development programmes, such as Keppel Young Leaders and Advanced Leadership. Keppel DC REIT also regularly engages with employees through satisfaction surveys and focuses on improving the health and wellness of its personnel. Management has earmarked its commitment to address climate change issues, as illustrated by it being a signatory of the Climate Neutral Data Centre Pact.
  • Keppel DC REIT also said that it will utilise green energy, where available, at its data centres.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2021-10-19
SGX Stock Analyst Report BUY MAINTAIN BUY 3.15 DOWN 3.190