• While we continue to like Keppel DC REIT (SGX:AJBU) as its pure-play data-centre proxy in Singapore, its meteoric rise to new heights is noteworthy.
• Trading at a forward yield of 3.3%, inclusive of assumed S$600m (vs S$350m previously) in acquisitions, we believe that market has priced in the bulk of its prospective growth into valuations. As such, we downgrade the stock to a HOLD and raise our target price to S$2.55 as we increase our acquisition assumptions.

Raising Acquisition Assumptions From S$350m to S$600m

• We expect Keppel DC REIT (SGX:AJBU) to deliver on acquisitions through the course of 2020 given the robust valuations that the stock trade at. In our estimates, we previously priced in S$350m of acquisitions given that Keppel DC REIT will have to rely entirely on third-party acquisitions in FY20.
• Based on our understanding, pipeline assets from the Sponsor are mostly in Europe, more specifically Frankfurt and The Netherlands. But these assets need time to stabilise and will likely only be ready for Keppel DC REIT after FY20 and are thus not ready for injection in the immediate term. There are currently no assets in Singapore for further injection into the REIT.
• We believe that acquisitions in FY20 will most likely come from Australia and Europe given the attractive spreads (cap rate – funding costs) while the lack of data centres for sale in Singapore limits its ability to further add to its Singapore portfolio.
• However, based on its historical track record of delivering acquisitions, we believe Keppel DC REIT can deliver a higher target in 2020 and thus raise our estimates from S$350m to S$600m. Our estimates are accordingly revised to account for this higher acquisition target assumption.
• Over the last three years, Keppel DC REIT has acquired close to S$400m of third-party assets.
• With the deepened presence in Europe and Australia, Keppel DC REIT will have more access to deals in these markets and is poised to grow further.

Assume More Acquisitions, But Within Limits

• Taking reference from past transactions, we believe in Keppel DC REIT’s ability to acquire assets from third parties in Europe and Australia albeit at a smaller quantum as compared to acquisitions in Singapore.
• With Keppel DC REIT’s current yield of 3.3%, it can easily acquire accretively; but we are confident of Management’s disciplined approach to acquire assets that create value.
• As such, we increased our acquisitions projections from S$350m to S$600m; a more than 20% growth in portfolio (after accounting for Kelsterbach data centre that is expected to complete in FY20).
• However, higher-than-projected acquisition(s) could still be a possibility given recent portfolio deals done by other REITs.
• Our base-case revised assumptions are:
  • S$600m in acquisitions
  • 40:60 (debt:equity) funding structure
  • Yields are based on Target Price of S$2.55
• Based on our above assumptions, we see a 12.8% accretion to DPU in FY21, forward yield of 3.7%, and EV/EBITDA multiple of 24.9 times, a multiple which we are comfortable with.
• Our FY20 DPU estimates remain at 8.3 Scts with a forward yield of 3.3%.
• We may revisit these assumptions if:
  1. acquisitions are done earlier than expected,
  2. acquisitions are more than expected,
  3. NPI yields of acquisitions are above our estimates of 6.5%.

Raise Target Price to $2.55; But Recommendation Cut to HOLD

• We continue to like Keppel DC REIT for its visible earnings growth with the addition of Keppel DC Singapore 4, DC1, and Kelsterbach DC in FY20. Our estimates for portfolio growth will further increase FY21 DPU by 12.8% to 9.3 Scts.
• However, given its current rich pricing, we downgrade our recommendation to HOLD based on;
  1. our threshold for portfolio to grow by S$600m,
  2. forward yields of 3.3% and 3.7% for FY20 and FY21 respectively,
  3. EV/EBITDA multiple relatively in line with other DC REITs in the US and Australia,
  4. investors may have priced in growth in portfolio that seems too aggressive in our view.
• Based on the increased acquisition assumption of S$600m, our DCF-based Target Price has been raised to S$2.55.

Source: DBS Research - 25 Feb 2020