The Positives

• Healthy portfolio occupancy of 93.2% and long WALE of 8.0 years. Income visibility from long WALE. Occupancy at Keppel DC Dublin 1 increased by 0.7pp from 61.1% to 61.8% due to retail clients – small expansion of space and a new tenant signed.

• Lower cost of debt due to new issue of MTN and early refinancing of loan. Average cost of debt fell 0.2pp from 1.9% to 1.7% as a result of locking in a lower Euribor on EUR50mn MTNs. Slight increase in gearing from 30.8% to 32.5% still leaves debt headroom of S$273mn, assuming 40% gearing.

• Revenue uplift from 2 AEIs on pre-committed lease and increase in power utilisation, 1 AEI to increase energy efficiency. Retrofitting works at Keppel DC Singapore 3 (currently at 100% occupancy) to increase client’s wattage will utilise extra power on hand and increase revenues. Cost of retrofit will be borne by client; estimated completion mid-2019 with no disruption to business. Power upgrade and fit out for client expansion will bring occupancy at Keppel DC Dublin 2 from 90.7% to 100% and is expected to be completed in September 2019 will increase revenue by c.S$2mn p.a.. AEI to improve energy efficiency at Keppel DC Dublin 1 (occupancy 61.8%) will cost S$20mn and be completed in 2020.

The Negatives

• No improvement in occupancy at Basis Bay Data Centre in Cyberjaya. Occupancy unchanged at 63.1% for eight consecutive quarters due to political uncertainty.

Outlook

Despite no deal flows in the past 6 months due to lack of supply of assets, the management has a healthy pipeline of off-market deals in discussion. Management is conducting a feasibility study on converting some of their office space at Keppel DC SG 5 (84.2% occupied) into data centres. Doing so will require bringing more power and equipment onsite.

Local demand for DCs still strong, driven by hyperscale cloud players (colocation tenants) are looking for bigger spaces and sites to lease out. Demand for DCs under pinned by increasing cloud adoption (e-commerce, social media, online gaming and advertising) and rapid digital transformation (VR, AR and mobile data traffic).

Maintain ACCUMULATE; new target price of $1.59 (previously $1.52)

We maintain our accumulate call and raise our TP to $1.59 due to revenue additive AEIs secured by pre-committed leases and lower cost of debt. Our TP implies a 13.3% yield and 1.37 times FY19e P/NAV multiple.

Relative valuation

KDCREIT trades at a higher P/NAV multiple compared to other listed S-REITs. We believe this is a reflection of the burgeoning demand for the unique asset class of data centres.