• Raising Target Price to reflect refreshed discount rates and new acquisitions to be delivered in 2H19.
• Potential index inclusion to keep investors vested in the stock.
• Keppel DC REIT's 2Q19 results in line; operational metrics remain stable.
• Low gearing of 30% offers upside to deliver on opportunistic deals.

BUY, Target Price Raised to S$1.90

• Trading at a yield of 4.5% and low gearing of 31%, KEPPEL DC REIT (SGX:AJBU) remains in a virtuous cycle. It is one of the few REITs in Singapore capable of making accretive acquisitions, supported by a conducive cost of capital. We believe that the REIT will deliver on market expectations of acquisitions which will keep valuations at a premium.
• Keppel DC REIT is projected to deliver a robust 2-year CAGR of 6.0% growth in DPU in FY19-20. Maintain BUY!

Where We Differ: Our Target Price Is Higher Than Consensus

• Our Target Price of S$1.90 is the highest on the street. Our numbers were raised further as we impute acquisitions in our estimates (S$400m @ 6.5% yield, funded 60% by equity).
• Fuelled by a visible acquisition pipeline from the Sponsor and the manager scouting the globe for opportunities, we believe that the ability to deliver on acquisitions is high.

Potential Catalyst: Potential Indexation and Strong Operational Results

• Keppel DC REIT's 2Q19 results were in 93.0% and as up are likely to see medium.
• In addition, given the strong market price performance YTD, we remain excited that its potential to be included in a major property index (EPRA Nareit developed Asia Index) could keep valuations at a premium going forward.

What's New - Soaring Up and Above

Strong half higher y-o-y.

• Revenue and net 13.2% and 136% to S$47.5m and S$433m SGP 5 by variable from the Singapore more than compensated 9.0% y-o-y due to an expanded 1.93 Scts (estimated total quantum of S$26.1m), translating into a payout ratio of 96%.

Singapore; selected properties.

• Operational metrics generally remained 7.8% from 2H19.
• In Keppel DC REIT’s overseas properties, ongoing upgrading works continue (power upgrading and fit-out works) at Keppel DC Dublin 1, where occupancy rates still hover around 61.8% (vs 61.1% in 4Q18) but are seeing a good level of interest from prospects. The manager believes that head upon completion.

Financial firepower bond issuances?

• Keppel DC REIT’s loans expiring in 2019. We hedge position.
• We understand that Keppel DC REIT will risk over the next few years.

Imputing acquisitions in our forecasts; lowering discount rates to reflect the more dovish FED.

• We believe that Keppel DC REIT is in a virtuous pipeline and ability to execute accretively, we have 40% debt.
• Gearing should remain at cut our discount rates (-50bps in our risk-free rate and cost of debt). This has raised our DPU estimates by 5% and our target price to S$1.90.
• Indexation remains a stock.

Source: DBS Research - 17 Jul 2019