A look at the assets
Keppel Data Centre 4 (KDC4) – S$384.9mn
1-Net North Data Centre (1NN) – S$200.5mn
Impact on KDC
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.
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.
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.