Keppel DC REIT: Acquisition driven growth October 17, 2017

PSR Recommendation: NEUTRALStatus: MaintainedTarget Price: SGD1.36
  • Gross revenue beat our forecast by 7.5%, on higher than expected gross rental and one-off other income
  • DPU in line with our forecast.
  • Headline 16.8% YoY DPU growth overstated; historical 3Q16 DPU was 1.90 cents.
  • Portfolio remains stable with no major surprises.

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The positives

  • Portfolio WALE remains long, despite shortening QoQ from 9.4 years to 9.2 years: We expect weighted average lease expiry (WALE) to be further extended, after the two major tenants in the Singapore properties renew their leases by the end of the year. No change in status since the previous quarter, in that the leases have been agreed upon in-principle and are pending finalisation of lease documentation. The two tenants are expected to retain the same amount space.
  • Portfolio occupancy inches up marginally from 93.1% to 93.4%: This was from slightly better occupancy at KDC SGP 1 and KDC Dublin 1.
  • Aggregate leverage remains low at 32.1%, despite rising QoQ from 27.7%: Higher aggregate leverage following the drawdown of ~€66 mn (~S$101 mn) short-term loan to fully fund the acquisition of B10 Data Centre in Dublin in mid-September. Weighted average debt maturity stands at 2.5 years, but this should be extended out as the manger intends to refinance 2017’s debt to a 5-year loan.

The negatives

  • KDC Dublin 1 is still under-utilised: 57.6% occupancy is slightly higher than the 56.3% a quarter ago. Upgrading of the DC’s power supply is scheduled to commence in 4Q17, but no timeline has been given for completion. It should be easier to backfill the DC after the upgrade is completed.

Outlook

The possibility of an equity fund raising exercise soon is at the back of our mind. Current aggregate leverage of 32.1% is close to the historical high of c.32.5% after the acquisition of the Milan DC in October 2016. Shortly after, a Preferential Offering was completed in November 2016 in conjunction with the acquisition of KDC SGP 3. The price of KDCREIT has made a good run, and the current price is 1.41x P/NAV. The conditions are ripe to raise new equity with the next acquisition.

Maintain Neutral, higher target price of $1.36 (previously $1.31)

We raise our FY17e/FY18e DPU forecast by 6.5%/10.9% as we tweak our revenue assumptions. Our target price represents an implied FY17e P/NAV multiple of 1.42x.

Relative valuation

KDCREIT is relatively over-valued in terms of trailing P/NAV, in comparison to its Australia Stock Exchange (ASX)-listed peer, Asia Pacific Data Centre.

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About the author

Profile photo of Richard Leow

Richard Leow
Investment Analyst
Phillip Securities Research Pte Ltd

Richard covers the Transport Sector and Industrial REITs. He graduated with a Master of Science in Applied Finance from the Singapore Management University. He holds the CFTe and FRM certifications and is a CFA charterholder.

He was ranked #2 Top Stock Picker for Resources & Infrastructure in the 2016 Thomson Reuters Analyst Awards.

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