• Downgrade to HOLD from Add with a Target Price of S$1.67 as positive industry fundamentals and potential catalysts have been fully priced in.
• Occupancy stays at 93.2% and could go up upon completion of AEI at Dublin 2 while gearing was reduced to 31.9% due to partial repayment.
• Keppel DC REIT's 2Q/1H19 DPU of 1.93/3.85 Scts (+6.0%/6.4% y-o-y) was in line at 24/48% of our and consensus’ FY19 forecasts due to acquisitions in FY18.

Downgrade to HOLD From Add With a DDM-based Target Price of S$1.67

• We downgrade KEPPEL DC REIT (SGX:AJBU) to Hold due to high valuations of 1.6x P/BV and 4.7% yield which are > +2 s.d. above the historical average (historical average of 1.3x and 5.8% respectively).
• We adjust our forecasts to account for the delay in completion of the new IC3 asset and obtain a Target Price of S$1.67. If we include the potential acquisition of SGP4, our Target Price would be raised to S$1.74.
• While we are still positive on the data centre industry due to its future-ready characteristics, we think investors could look for a lower entry point.
• Key positive re-rating catalyst could be the accretive acquisition of SGP4 and possible index inclusion while weaker foreign currencies could present additional downside risk.

Occupancy Remains With Room

• Portfolio occupancy continues to remain at 932% vacancies being at SGP5, Basis Bay and the Dublin 1 and 2 data centres.
• According to Keppel DC REIT, occupancy at Dublin 2 is expected to increase to 100% upon completion of its power upgrade and fit-out works in 2H19.
• Weighted average lease expiry declined to 7.8 years from 80 years in 1Q19 due to natural time decay of leases. Upcoming expiries in FY19/FY20 continue to remain low at 2.4%/4.9%.

Capital Remains Lower of 31.9%

• Keppel DC REIT’s gearing was brought down to 31.9% from 325% in the previous quarter due to the management, this was funded by some proceeds from the €50m MTN taken on in 1Q19.
• It has 17.1% of its loans due in FY19; management is in the process of refinancing these loans. Average cost of debt remained at 1.7% while weighted average debt tenor declined slightly to 3.1 years from 3.3 years due to natural time decay. To reduce its exposure to interest rate fluctuations, Keppel DC REIT has also continued to hedge 80% of its loans.

2Q19 Results in Forecasts

• Keppel DC REIT's 2Q/1H19 DPU of 1.93/3.85Scts (+6.0%/6.4% y-o-y) was in line forming 24%/48% of our and consensus’ FY19 forecast. The improved performance y-o-y was due to contributions from the acquisitions of maincubes and SGP5 data centres completed in 2018 but slightly offset by lower variable income from the other Singapore properties as well as the weaker A$, € and £ against the S$.

Source: CGS-CIMB Research - 16 Jul 2019