Highlights

Simons Trading Research

Author: simonsg   |   Latest post: Thu, 18 Apr 2019, 9:53 AM

 

Keppel DC REIT - Hungry for More

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  • Keppel DC REIT's 2Q18 DPU in line; forward outlook buoyed by recent acquisition of KDC Singapore 5. 
  • Operational results remain stable with limited expiries, implying high income visibility. 
  • Lower gearing of 32% empower REIT with firepower to acquire. 

BUY, Target Price S$1.52

Trading at a yield of 5.6%, Keppel DC REIT (KDC REIT) remains one of the few REITs in Singapore that can make accretive acquisitions, supported by low cost of capital. The REIT is projected to deliver a solid 3% CAGR in distributions, supported by ambitious growth plans.

Maintain BUY with Target Price revised to S$1.52.

Where We Differ: Our Target Price Is Higher Than Consensus

Our Target Price of S$1.52 is the fund raising.

Our numbers could be raised by a further 3% if the manager achieves tax transparency status for its stake in KDC SGP 5, which we have not priced in.

Potential Catalyst: Rebound in Operational Performance

2Q18 results were in line with expectations, coupled with a sustained portfolio occupancy of 92.0%. With limited expiries over the coming two financial years, there is high income visibility.

A pick-up in occupancies and rental reversionary prospects turning positive could help lift our earnings estimates.

Valuation

We maintain our BUY recommendation with DCF-based Target Price of S$1.52.

Key Risks to Our View

Competition from larger third-party data centre players. The data centre market is dominated by several large international operators which have been aggressively expanding into markets where KDC REIT has a presence.

KDC REIT may face higher barriers to entry and stiffer competition to attract and retain tenants.

WHAT’S NEW - Powered by Acquisitions

Improved quarter driven by acquisitions.

Keppel DC REIT (KDC REIT)'s 1H18 gross rental income grew by 19.8%% y-o-y to S$79.9m mainly on the contribution from an expanded portfolio (KDC Dublin 2 and KDC Singapore 5, maincubes DC) and higher power revenue and revenues from its Singapore data centres and KDC Dublin1. This was aided somewhat by the appreciation of the GBP, MYR and EUR against the SGD.

Other income of S$2.0m rose 4.9% y-o-y to S$43.9m. Stripping out these capex reserves, DPU would have increased by 4.0% to 3.62 Scts.

Cash flows from operating activities dipped to S$39.7m, largely due to higher working capital requirements.

Net cash used in investing activities for 1Q18 was S$431.8m, mainly from the acquisition of maincubes DC, capex and KDC Singapore 5. This was mainly funded by S$221.2m of bank borrowings and MTN raised during 1H18 and equity raising 303.1m in 2Q18.

Steady operating metrics.

Operational metrics generally improved with occupancy rate dipping marginally to 8.8 years. This was mainly due to lower occupancy rates of KDC Singapore 5, which was ramping up (occupancy rate of 73.9%).

Planned capex of an estimated S$20m at KDC Dublin 1 (occupancy rate improved marginally q-o-q to 56.8% and is expected to drive overall power efficiency at the property.

Overall gearing had inched down to 31.7%.

Overall gearing had inched down to 31.7% as of end-2Q18, a level providing the REIT with potential acquisition headroom, given management’s comfortable range of 30-40%. The Manager is reviewing opportunities in both new and existing markets as they look to bulk up and grow distributions and AUM.

Source: DBS Research - 18 Jul 2018

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