• 3Q21/9M21 DPU of 2.462/7.386 cents grew 4.5%/9.7% YoY. 9M21 DPU was in line, at 75% of our FY21e estimate.
• S$281mn in completed and proposed investments YTD could provide more than 6% in DPU accretion for KDC.
• Maintain BUY on the resilient data centre demand. FY21e/22e DPU dips 0.3%/4.1% after we adjust our forecasts to factor in recent transactions. DDM-based TP (COE 5.75%) cut by 5.3% from S$3.20 to S$3.03 due to lower FY21e-FY25e DPU estimates. Figure 1 summarises the estimated contributions from announced investments versus our previously assumed S$500mn acquisition.

The Positives

+ 3Q21 DPU +4.5% YoY due to acquisitions and AEI. DPU lifted by acquisition of Amsterdamn DC and Eindhoven Campus in Dec20 and Sep21, and AEIs at KDC SG5, Dub1, Dub2 and DC1. KDC renewed c.7.2% of expiring GRI in 3Q21, bring FY21 expiries to 0.4% of GRI. Occupancy remains high at 98.1% with WALE increasing QoQ from 6.5 years to 7.0 years due to the commencement of a 20-year lease at Intellicentre Campus in Jul21.

+ Fruitful quarter of capital recycling. KDC divested iSeek DC for S$35.3mn in Aug21, 21% and 1.4% above IPO and market valuation respectively. It also acquired Eindhoven Campus in Sep21 and inked the NetCo agreement in Oct21. The three investments (Figure 1) announced year-to-October totalled S$281mn, carrying weighted average yield of 8.3%. The acquisition of Eindhoven Campus was completed on Sep21, while the remaining two investments – Guangdong DC and investment in NetCo bonds – are estimated to be completed in 4Q21. We estimate that these acquisitions could provide more than 6% DPU accretion for KDC.

The Negative

– Basis Bay DC lease expiring in c.8 months may be at risk. Basis bay is a colocation asset located in Malaysia. Occupancy has remained at 63.1% since 2Q17. The management has previously cited weak interest in the asset. However, NPI contribution from this asset has been reduced by AUM growth and currently contributes c.1% to NPI.

Outlook

KDC is evaluating several on- and off-market deals with cap rates ranging 4-5%. Cap rates have compressed 50-75bps since a year ago. KDC’s low cost of debt of 1.6% should still leave room for accretive acquisitions. The Sponsor group of affiliates manages more than S$2bn in data centre assets KDC could potentially acquire. KDC also has a ROFR on the remaining five data centres located within the Bluesea Intelligence Valley from the vendor of Guangdong DC.

Still no updates on Singapore’s moratorium on data centres which was rumoured to be lifted this year. Should it happen, supply could increase over the next 2-4 years. However, stickiness of data-centre tenants and Keppel’s track record as a data-centre operator should help it retain tenants.

Maintain BUY with a lower DDM TP of S$3.03 (prev. S$3.20)

FY21e/22e DPU dips 0.3%/4.1% after we adjust our forecasts to factor in the divestment of iSeek DC and investments in Eindhoven Campus, Guangdong DC and NetCo, while reversing our previously assumed S$500mn acquisition at 6% NPI yields. DDM-TP cut by 5.3% from S$3.20 to S$3.03 due to lower FY21e-FY25e DPU estimates. Figure 1 summarises the estimated contributions from announced investments versus our previously assumed S$500mn acquisition. Current share price implies FY21e/22e DPU yields of 4.1% and 4.5%.

Stock catalysts are expected from acquisitions and higher 5G, smartphone and cloud adoption. Despite its expansion of mandate, KDC will remain data centre-focused, maintain at least 90% of its assets in data centres and will only consider assets that have been 50% leased at a minimum.

Source: Phillip Capital Research - 27 Oct 2021