Keppel DC REIT – Delivering, as expected October 16, 2019 1127

PSR Recommendation: ACCUMULATE Status: Maintained
Last Close Price: S$2.02 Target Price: S$2.060
  • 3Q19 NPI and DPU were in line with our estimates. 9M DPU formed 74.2% of our FY19 estimates
  • Portfolio metrics healthy; occupancy crept up 0.7% ppts and while post-acquisition gearing will settle at 30.3% (historical average 30.7%)
  • Maintain ACCUMULATE with a higher target price of $2.06 (previously $2.00). We raise our estimates by 2% to reflect the tightening DC market which will help provide support for rents

 

The Positives

  • Ramp-up in operations was more than able to make up for the income support falling off. The rental support for KDC SG 5, KDC Dub 2 and Milian DC were fully utilised as at 2Q19. Management commented that the ramp-up stabilisation of these assets surpasses the rental support previosuy drawn.
  • Portfolio occupancy improved 0.3ppts QoQ from 93.2% to 93.6%. This was due to new leases signed at KDC SG 1 (+0.7ppts) and KDC Dub 1 (+3.9ppts). Post-retrofitting, KDC Dub 2’s occupancy increased 9.3ppts to 100%.
  • Refinanced all loans maturing in 2019 with a 6 year term loans. All-in cost of borrowing expected to be unchanged at c.1.7%.

 

The Negatives

  • No improvement in stubborn vacancy rate at Basis Bay DC (Malaysia). Occupancy has remained at 63.1% for the last 10 consecutive quarters.

 

Outlook

Vacant, non-DC NLA poses potential for conversion to data centre (DCs), making KDC a beneficiary of tapering DC supply in Singapore. Currently, 22,178 sqft of NLA – 6.4% and 15.8% from KDC SG 1 and KDC SG 5 – are non DC space. KDC is in the midst of getting government approval to bring more IT power onsite to convert the space at KDC SG 5 to DC space.

 

Maintain ACCUMULATE with a higher target price of $2.06 (previously $2.00)

We raise our estimates by 2%  to reflect the strong demand for DCs admist the tightening DC supply. Our TP of $2.06 implies a 3.8%/4.46% FY19e/FY20e DPU yield.

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Natalie Ong
Research Analyst
Phillip Securities Research

Natalie covers the REITs and Property sector. Previously a business analyst with a management consultancy, she handled feasibility studies and business optimisation and restructuring projects. She has worked with companies from varied industries including logistics, FinTech, EduTech, gaming, F&B and retail. She graduated with a Bachelor of Science (Honours) in Banking & Finance from the University of London.

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