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Analysts mixed on Keppel DC REIT's 1Q results

Felicia Tan
Felicia Tan4/22/2021 5:15 PM GMT+08  • 4 min read
Analysts mixed on Keppel DC REIT's 1Q results
OCBC Investment Research and PhillipCapital have rated "buy" and "accumulate" on the REIT while CGS-CIMB has kept its "hold" call.
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Analysts are mostly positive on Keppel DC REIT’s results for the 1QFY2021 as the REIT reported an 18.1% increment y-o-y in distribution per unit (DPU) of 2.462 cents.

See: Keppel DC REIT 1Q21 DPU up 18.1% to 2.462 cents due to new acquisitions and AEIs

The research team from OCBC Investment Research (OIR) has recommended investors “buy” the REIT albeit with a lower fair value estimate of $3.32 from $3.51 previously.

The lower fair value estimate comes after increasing its risk-free rate assumption to 1.9% in its model, compared to the 1.55% previously, says the team.

“Keppel DC REIT is a strong proxy to growing demand for data centre space, underpinned by increasing digitalization and cloud adoption trends,” writes the OCBC team.

“It is also one of the most defensive REITs given its long portfolio weighted average lease expiry (WALE) of around 6.6 years,” it adds.

In its April 21 report, the OCBC team says the REIT’s higher gross revenue and net property income (NPI), which rose 10.6% and 10% y-o-y to $66.7 million and $61.0 million respectively, stood in-line with its expectations.

The REIT’s DPU accounted for 25.4% of its FY2021 forecasts, which also came close to their FY2021 estimates.

A major acquisition, notes the team, would be the key re-rating catalyst for the REIT.

“[Keppel DC REIT] remains on the hunt for acquisitions, and management highlighted that it has seen a 50-

75 basis points compression in cap rates in the markets which it is looking at,” it writes.

“Data centre cap rates can range from sub-5% for shell and core assets in good locations to above 7% for some colocation assets. We believe one of the underlying strengths of Keppel DC REIT is its ability to make good acquisitions, and we see its next major acquisition as the key re-rating catalyst for its share price,” it adds.

Similarly, PhillipCapital analyst Natalie Ong has maintained her “accumulate” call on Keppel DC REIT with the same target price of $3.20 from previously.

“[There are] no change in our estimates. Our target price assumes $500 million worth of acquisitions in 4QFY2021 (NPI yields 6% and loan-to-value 30%),” says Ong.

“We are forecasting FY2021/2022 DPU yields of 3.7% and 4.2%. Keppel DC REIT is trading at 2.2 times price-to-book (P/B). Dividend yield spread of 188 basis points is close to its 5-year average of 200 basis points. This is attractive against its 2019/20 average yield spread of 100 basis points,” she adds.

Like the OCBC team, Ong views acquisitions to be one of the factors for the stock’s catalysts.

Higher 5G, smartphone and cloud adoption are also some of the other factors that may increase the REIT’s unit price, she notes.

Ong also views the REIT’s 1Q results as being “in-line”, with its DPU at 25.0% of her FY2021 estimates.

The way she sees it, the REIT’s moves on the acquisition of the Kelsterbach DC in Amsterdam and the completed asset enhancement initiatives (AEIs) at DC1 and Keppel DC Dublin 2 have paid off.

Looking ahead, Ong sees the demand-supply gap to push up market rents.

“About 27.9% of its leases by gross rental income (GRI) or 6.9% of net lettable area (NLA) will expire in 2021. Most of the leases will be from Singapore and Malaysia colocation assets, which have shorter WALes of 1.2 to 1.8 years,” she writes.

“Singapore is Keppel DC REIT’s core market, accounting for 56% of its assets under management (AUM). Given the moratorium on data centres in Singapore, there is a strong likelihood that market rents will be bid up in the coming two years, coinciding with its lease expiries.”

“While Keppel DC REIT has not started engaging tenants in renewal negotiations, data centres’ tenant stickiness and limited alternatives imply potentially high retention rates for Keppel DC REIT,” she adds.

CGS-CIMB Research analysts Eing Kar Mei and Lock Mun Yee, on the other hand, are less certain on the REIT, even though its results, too, came in line with their FY2021 forecast.

The analysts have maintained “hold” on Keppel DC REIT with an unchanged target price of $2.86.

“Covid-19 has fuelled further demand for and underpinned the importance of data centres, but we believe this

has been priced in. The REIT is trading at <4% dividend yield,” they write.

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Like PhillipCapital’s Ong, Eing and Lock believe the leases under the REIT will be renewed given the “strong stickiness” of data centre customers.

“While the demand for data centres is strong, rental reversion should be relatively stable as the REIT retains the long-term relationship with its customers,” they say.

Like the analysts from OCBC and PhillipCapital, CGS-CIMB’s Eing and Lock also believe that acquisitions are essential to drive “substantial DPU growth” for the REIT.

Units in Keppel DC REIT closed 2 cents higher or 0.7% up at $2.71 on April 22.

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