Keppel DC REIT – Double happiness: Double-digit DPU accretive acquisition September 18, 2019 1579

  • 1Highly accretive proposed acquisition of 99% stake in KDC4 and 100% stake in 1NN will increase DPU by c.12.4% and AUM by 30.7%.
  • FY19e DPU to fall 0.42 cents from 7.98 cents to 7.56 cents due to the enlarged unit base while FY20e DPU will increase 0.37 cents from 8.33 cents to 8.70 cents, translating to DPU growth of 15.1% in FY20.
  • 6x P/NAV is well supported; private placement of S$235.4mn was 9.3 times subscribed.
  • Upgrade to ACCUMULATE with a higher target price of $2.00 (previously $1.71).

 

A look at the assets

  • Acquisition of KDC4 and 1NN for agreed value of S$384.9mn and S$200.5mn respectively.
  • Equity fund raising grossed S$473.8mn comprising of a S$235.4mn private placement tranch and S$242.8mn preferential offering. The private placement was 9.3x oversubscribed. 91.7% of proceeds will be used to fund the acquisition, implying a 80:20 equity-to-debt ratio.
  • Proposed acquisition is subject to a shareholder vote. The EGM is likely to take place in end-October/early-November, with deal headed towards a end-November completion.
  • Acquisition will increase the AUM in Singapore from 51.1% to 62.7%.

 

Keppel Data Centre 4 (KDC4) – S$384.9mn

  • Proposed acquisition of 99% interest in KDC4, a five-story colocation asset with NLA of 84,544 sq ft. KDC4 has committed occupancy of 92% and is located in Tampines.
  • Pro forma DPU accretion ranges from 4.1% – 7.5% (figure 1 and 2), the higher-end accretion is contingent on IRAS’s approval of the REIT tax transparency status for the KDC4 target entity.
  • KDC4 is a 2-year-old asset which is currently under stabilization. As revenues are driven by the amount of power utilised by the tenants, rental support of c.$8.8m has been negotiated to cover the 24-month period after completion of the sale to provide rental top-ups during the initial period as clients progressively power up their racks. The rental top-ups will ensure that KDC will receive a NPI yield of at least 7% during the initial 2 years. The stabilised NPI yield for KDC4, given current 92% occupancy, will be 7.5%.
  • At the current committed occupancy of 92%, KDC4’s stabilised NPI yield stands at c.7.5%. As all the IT power is fully committed, additional Capex will be required to bring more power onsite in order to lease out the remaining 8% of space as data centres. Alternatively, the remaining space could be leased out as ancillary office space.

 

1-Net North Data Centre (1NN) – S$200.5mn

  • Proposed acquisition of 100% interest in 1-Net North Data Centre (1NN), a five-story triple-net master-leased asset with NLA of 213,815 sq ft.
  • First assets located in the North (Woodlands) and provides diversification; while master lease provides income visibility and stability.
  • Of the five floors, four are data centres (DC) and the remaining floor is comprised office and ancillary space.
  • 1NN’s NPI yield of 9% will provide DPU accretion of 6%
  • 100% occupied on a 17 + 7.6 year lease term.

 

Impact on KDC

  • Significant DPU accretion from 9.4% – 12.4%.
  • Stronger portfolio: Better diversification across lease types (figure 3 and 4); WALE will be increased to 8.9 years from 7.8 years; and portfolio occupancy will improve form 93.2% to 94.1%. Leverage will fall 160bps from 31.9% to 30.3%.
  • Greater leasing synergies and operational efficiency due to economies of scale given close proximity of KDC4 to KDC2 and KDC3.

 

What do we think?

A highly anticipated, well-timed and positive move. The proposed acquisition is highly accretive and results in a stronger enlarged portfolio as well as better financial metrics.

 

Outlook

The announcement of the dual acquisition comes hot on the heels of KDC’s inclusion into the FTSE EPRA NAREIT Developed Index. KDC’s rich valuation of 1.6x P/NAV is well supported given the added visibility from index inclusion, their niche portfolio of data centres and track record of acquisition-driven DPU growth.

Despite the sizable two-asset acquisition, acquisitions within the next 12 months are still a possibility as discussions with several third-party sellers have been underway since the start of 2019.

 

Key risks

The key risk remains the attainment of the tax transparency status for the entity holding KDC4. KDC successful attained tax transparency status for KDC1, KDC2, KDC3 and most recently KDC5 in January 2019 (acquired 12 June 2018). The confirmation of tax transparency is expected to be announced between 6 – 9 months after application.

 

Upgrade to ACCUMULATE with a higher target price of $2.00 (previously $1.71)

KDC’s cost of funds have been falling steadily since listing (FY15/FY17/2Q19 2.5%/2.3%/1.7%). We lower our cost of equity assumption by 48bps from 6.99% to 6.51% to reflect the lower risk-free rate.

We adjust our forecast to incorporate the proposed acquisitions and the lower cost of equity assumption. Our target price translates to a FY19/FY20 DPU yield of 3.8%/4.4% and a FY19 P/NAV of 1.64x.

 

 

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:

  1. recipients of the analyses or reports are to contact Phillip Securities Research (and not the relevant foreign research house) in Singapore at 250 North Bridge Road, #06-00 Raffles City Tower, Singapore 179101, telephone number +65 6533 6001, in respect of any matters arising from, or in connection with, the analyses or reports; and
  2. to the extent that the analyses or reports are delivered to and intended to be received by any person in Singapore who is not an accredited investor, expert investor or institutional investor, Phillip Securities Research accepts legal responsibility for the contents of the analyses or reports.
Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments

Get access to all the latest market news, reports, technical analysis
by signing up for a free account today!