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Analysts raise target prices on Keppel DC REIT; maintain 'hold' calls

Felicia Tan
Felicia Tan • 4 min read
Analysts raise target prices on Keppel DC REIT; maintain 'hold' calls
Analysts from CGS-CIMB, DBS Group Research, OCBC, and PhillipCapital have raised their target prices on Keppel DC REIT, due to met expectations on its 1H20 results.
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SINGAPORE (July 22): Analysts from CGS-CIMB, DBS Group Research, OCBC, and PhillipCapital have raised their target prices on Keppel DC REIT, due to met expectations on its 1H20 results.

However, the analysts have maintained their “hold” or “neutral” calls on the REIT.

On July 21, Keppel DC REIT posted a 13.6% increase in its distribution per unit (DPU) to 4.375 cents for 1H20, compared to the DPU of 3.85 cents declared in 1H19.

CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee increased their target price on the stock to $2.88 from $2.17 previously, as the REIT’s 1H20 DPU came in within their expectations, at 46% of their estimated DPU for FY20F.

However, they have maintained their “hold” call as they believe the market has priced in the strong demand for the REIT.

Eing and Lock have also raised their DPU forecast for FY21-22F by 4-4.5%, and rolled over their FY21F dividend discount model (DDM)-based target price to $2.88 due to Keppel DC REIT’s upcoming acquisition.

See also: CGS International keeps ‘hold’ call on Paragon REIT with lowered TP following divestment of Rail Mall

“We understand that KDC REIT is close to finalising a deal which could happen as soon as 3Q. The REIT is evaluating a wide range of deals which include new and existing countries with cap rates in the range of 4-7%,” they write in a report dated July 21.

“As the sponsor’s assets will not be ready in 2020, acquisitions in 2020 will be from third-parties. We factored in a $300m acquisition at 6.5% yield at 30:70 debt:equity funding into our FY21-22 DPU forecasts,” they add.

DBS analysts Dale Lai and Derek Tan have raised their target price for the REIT to $2.80 from its previous $2.55 to factor in current market conditions and improved efficiency of its properties.

See also: RHB likes ST Engineering for its contract wins and record order book, keeps ‘buy’ and TP

“We revised our risk-free rate assumption (from 2.5% to 2.0%) and applied tax transparency treatment for Keppel DC Singapore 4,” they state in a July 22 report.

“Despite the higher TP, we maintain our ‘hold’ call as there is only 2% potential upside and the stock is trading at a forward yield of 3.2%. KDC REIT’s share price is now at an all-time high after rallying more than 8% over the past two weeks,” they add.

Lai and Tan are also maintaining their acquisition projection of some $600 million for the REIT in FY20 on gradually easing travel restrictions.

PhillipCapital’s Natalie Ong has raised her target price on Keppel DC REIT to $2.57 from $2.31 due to its higher terminal growth rate of 2.0%, previously 1.5%.

Ong has raised her terminal growth rate assumption to better reflect the REIT’s acquisition-driven 5-year DPU compound annual growth rate (CAGR) of 2.7%.

“While we like KDC for its strong portfolio metrics and future-ready asset class, we think that upside is limited given the strong rally in prices and yields at c.3%, which are not compelling,” she says, maintaining her "neutral" recommendation.

OCBC’s research team has placed a fair value estimate on Keppel DC REIT at $2.86 from $2.54 previously due to growing demand for data centre space, which is supported by increasing digitalisation and cloud adoption trends.

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The team feels the REIT is also one of the most defensive due to its long weighted average lease expiry of around 7.4 years.

“KDCREIT’s financial position remains solid, with an aggregate leverage ratio of 34.5% and high interest coverage ratio of 12.8x,” according to the team, which has maintained its "hold" raiting.

“We lower our cost of equity assumption from 6.4% to 5.8% to align with our recent reduction in discount rate assumptions for REITs in more resilient sub-sectors, such as Mapletree Industrial Trust and Mapletree Logistics Trust,” they add.

OCBC’s research team says it has also lowered its terminal growth rate assumption by 25 bps to 2.5% to take into account potentially stronger competition for data centre assets in the longer-term.

As at 4.10pm, units in Keppel DC REIT were changing hands 1 cent lower, or 0.4% down, at $2.74.

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