+ Positives
+ FY20 NPI and DPU grew 37.7% and 20.5% YoY respectively, led by newly-acquired KDC4 and DC1 in Singapore (in 2H19) and Kelsterbach DC in Germany (on 1 May 2020). Portfolio occupancy was also higher from completed AEI and higher demand.
+ Portfolio occupancy improved QoQ from 96.7% to 97.8% (FY19: 94.9%). Higher occupancy in 4Q20 stemmed from: 1) the handover of newly converted DC space at KDC5 which lifted occupancy from 84.2% to 100%; 2) tenant expansion at KDC1 which increased occupancy from 89.2% to 91.1%; and 3) a new tenant at KDC2 which raised occupancy from 93.5% to 98.2%. AEI to bring more power onsite at Dub1 also allowed KDC to lease out additional space, bumping up its occupancy from 61.8% to 81.1%.
+ Acquired Amsterdam DC on 24 Dec 2020 for S$48.1mn; initial NPI yield of 5.1%. Amsterdam DC comprises a shell & core data centre and an office component, with occupancy of 99.1%. The asset is located near the Amsterdam Internet Exchange, one of the world’s largest hubs in terms of connections and traffic. Amsterdam DC has an occupancy of 99.1% and is leased to data-centre and IT service firms.
– Negative
– Natural decay of leases reduced WALE to 6.8 years (FY19: 8.6 years). Colocation (Colo) leases are the most profitable leases as rents include charges for facility management and the rental of M&E equipment. However, Colo leases typically run on shorter WALEs of 2.7 years vs. 11.2 years for fully-fitted and 7.3 years for shell & core data centres. Fortuitously, most of KDC’s Colo leases are in Singapore, which is a rising rental market due to limited new supply. As such, shorter WALEs should allow KDC to capture higher rents as the leases are marked to market upon renewal. In contrast, with a WALE of 1.5% and persistently low occupancy of 63.1%, KDC’s struggling Malaysian asset, Basis Bay (0.8% of AUM), may face occupancy risks should its existing tenant decide not to renew.
Outlook
Evaluating potential acquisitions. KDC is evaluating several piecemeal and portfolio acquisitions with cap rates of 5-7%. However, travel restrictions in several countries have prevented KDC from physically inspecting the assets overseas. Management has found a way around this, which is to focus on shell & core assets which are more passive in nature and rely on third-party valuers. Using this strategy, KDC was able to acquire Amsterdam DC before the year ended.
Demand-supply gap to push up market rents. Singapore is KDC’s core market, accounting for 56% of its AUM. Given the moratorium on data centres in Singapore, we expect market rents to be bid up in the coming two years. Present higher demand has led to higher occupancy for KDC’s portfolio, though market rents have not moved. While KDC’s portfolio occupancy in Singapore is high at 97.0%, Colo leases in Singapore have WALEs of 1.4-4.0 years. These coincide with expected rent appreciation. In the meantime, KDC is expected to benefit from organic growth as many of its leases have built-in periodic rental escalations averaging 2-4% p.a.
Upgrade to ACCUMULATE, DDM-based TP raised from S$2.91 to S$3.20
Changes from our previous report
Our DDM-based TP has been raised to reflect higher occupancy and asset productivity following AEI, which raises our NPI by 6.9% on a same store basis (excluding any acquisition assumption). Our previous TP of S$2.91 assumes that KDC will make a S$500mn of acquisitions in 1Q21e (NPI yield 6% and LTV 30%). In this report, we push back our S$500mn acquisition assumption (NPI yield 6% and LTV 30%) from 1Q21 to 4Q21.
Scenario analysis: with and without acquisitions
Our acquisition assumption reduces FY21e DPU by 5.4% due to an enlarged share base, but increases FY22e DPU by 5.3% (Figure 1).
Demand for data centres is supported by increasing 5G, smartphone and cloud adoption. KDC’s higher P/NAV of 2.4x (Figure 3) is supported by the forecast growth in data centres and its ability to deliver earnings growth through AEI, rental improvements and accretive acquisitions. We forecast DPU yields of 3.3%/3.8% for FY20e/21e, which should deliver a forward yield spread of 220bps, the average of its five-year historical yield spread over 10YSGS (Figure 2).
Important Information
This report is prepared and/or distributed by Phillip Securities Research Pte Ltd ("Phillip Securities Research"), which is a holder of a financial adviser’s licence under the Financial Advisers Act, Chapter 110 in Singapore.
By receiving or reading this report, you agree to be bound by the terms and limitations set out below. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.
The information and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this report has been obtained from public sources which Phillip Securities Research believes to be reliable. However, Phillip Securities Research does not make any representation or warranty, express or implied that such information or Research is accurate, complete or appropriate or should be relied upon as such. Any such information or Research contained in this report is subject to change, and Phillip Securities Research shall not have any responsibility to maintain or update the information or Research made available or to supply any corrections, updates or releases in connection therewith.
Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this report are as of the date indicated and are subject to change at any time without prior notice. Past performance of any product referred to in this report is not indicative of future results.
This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This report should not be relied upon exclusively or as authoritative, without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this report has been made available constitutes neither a recommendation to enter into a particular transaction, nor a representation that any product described in this report is suitable or appropriate for the recipient. Recipients should be aware that many of the products, which may be described in this report involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made, unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.
Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned in this report should take into account existing public information, including any registered prospectus in respect of such product.
Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this report, and may have performed services for or solicited business from such issuers. Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this report.
Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment.
To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold an interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this report. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, which is not reflected in this report, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this report.
The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.
This report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products.
This report is not intended for distribution, publication to or use by any person in any jurisdiction outside of Singapore or any other jurisdiction as Phillip Securities Research may determine in its absolute discretion.
IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSE
Where the report contains research analyses or reports from a foreign research house, please note:
