Keppel DC REIT: Acquisition of second data centre in Dublin September 14, 2017

PSR Recommendation: NEUTRALStatus: MaintainedTarget Price: 1.31
  • Acquisition of 100% interest in data centre located at Ballycoolin Business and Technology Park for €66.0mn (S$101.3mn)
  • Long WALE of 11.0 years, 87.3% occupied
  • Fully funded by debt, the manager expects it to be 6% accretive

What is the news?

Keppel DC REIT (KDCREIT) announced the acquisition of a carrier-neutral colocation data centre at Unit B10, Ballycoolin Business and Technology Park, Blanchardstown, Dublin 15, Ireland. The data centre is 87.3% leased to leading global internet enterprise, IT services and telecommunications clients. The data centre has approximately 25,200 sq ft of lettable area.

The purchase consideration of the data centre is for €66.0mn (S$101.3mn). The acquisition is to be fully-funded by debt and aggregate leverage is expected to increase from 27.7% to 32.4%. On an illustrative pro-forma basis, the acquisition is expected to be 0.37 cents DPU accretive.

How do we view this?

  • Long WALE of 11.0 years offers visibility to income stream

Post-acquisition, portfolio weighted average lease expiry (WALE) remains long at 9.4 years. (9.4 years as at 2Q FY17)

  • B10 data centre will be a non-core asset due to its size

The data centre adds only 25,200 sq ft of lettable area to the existing portfolio’s 892,040 sq ft. Only two other data centres are smaller – iseek data centre in Brisbane, Australia (12,839 sq ft) and GV7 data centre in London, United Kingdom (24,972 sq ft). Addition of the B10 data centre will bring the portfolio value to S$1.56bn.

  • 3% occupancy is lower than portfolio occupancy of 93.1% as at 2Q FY17

The remaining 12.7% has been set aside as expansion space for a tenant, who will possibly expand in 2Q 2018. Hence, the unutilised space is not a major concern at this time.

  • Dublin has one of the highest growth rate for new demand among KDCREIT’s European footprint

BroadGroup Consulting estimates new demand in Dublin to grow at a CAGR of 15.2% between 2014 and 2021. (Source: KDCREIT FY2016 Annual Report). This is the second highest growth rate among the European cities where KDCREIT already has a presence in. Dublin trails Cardiff, which has the highest CAGR of 19.8%.

Maintain Neutral; higher target price of $1.31 (previously $1.28)

We raise our FY17e/FY18e revenue and DPU forecasts by 1.5%/5.0% and 1.0%/3.0% respectively. Our target price represents an implied FY17e forward P/NAV multiple of 1.37x, which compares against the FTSE REIT Index forward 12-months P/NAV multiple of 1.05x.

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

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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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