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Analysts upgrade Keppel DC REIT following China acquisition but mixed on TP revisions

Atiqah Mokhtar
Atiqah Mokhtar7/27/2021 2:5 PM GMT+08  • 4 min read
Analysts upgrade Keppel DC REIT following China acquisition but mixed on TP revisions
Analysts are positive on the REIT's maiden China foray.
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A number of analysts have upgraded their ratings for Keppel DC REIT after it announced the acquisition of its first data centre in China on July 26. The REIT also announced its 1HFY2021 ended June results on the same day.

See: Keppel DC REIT makes maiden China foray with DPU accretive deal and Keppel DC REIT posts 12.5% DPU growth to 4.924 cents for 1HFY21

DBS and PhillipCapital upgraded their calls to “buy”, with DBS raising its target price to $3.00 from $2.80 previously, while PhillipCapital kept its $3.20 target price unchanged.

CGS-CIMB also upgraded from “hold” to “add”, but with a lower target price of $2.84 from $2.86 previously.

Meanwhile, OCBC Investment Research kept its "buy" call but with a lower target price of $3.19 from $3.32 previously.

DBS analysts Dale Lai and Derek Tan view that the “surprise” acquisition of the Guangdong Data Centre, which also includes the right of first refusal (ROFR) for five additional data centre buildings to be completed, has “reignited optimism on Keppel DC REITs growth trajectory”.

Lai and Tan point out that the acquisition of the Guangdong Data Centre at an NPI yield of some 9% is "highly" accretive.

The analysts also point out that the REIT’s 1HFY2021 DPU of 4.924 cents, up 12.5% y-o-y, was slightly above their projections, mainly driven by acquisitions of Kelsterbach Data Centre in Germany and Amsterdam Data Centre, as well as higher contribution from DC1 and Keppel DC 2 Dublin post-AEI .

Looking ahead, Lai and Tan anticipate DPU to grow by a compound annual growth rate of around 8% from now until FY2023, underpinning their higher target price.

The way they see it, the sustained DPU growth will be drive by the recent acquisitions, organic growth from asset enhancement initiatives, and further potential acquisitions. “We have assumed acquisitions of $300 million in 2H2022 in addition to the M1 network assets investment,” they say.

Meanwhile, CGS-CIMB’s Eing Kar Mei and Lock Mun Yee highlight that the REIT’s 1HFY2021 DPU missed their expectations, coming in at 47.1% of their full-year forecast due to a slower-than-expected acquisition pace.

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Given the slower pace, they have cut their FY2021 DPU forecast by 3.9%, underpinning their lower target price.

Nonetheless, the analysts are bullish on the longer-term outlook following the China acquisition. “We upgrade Keppel DC REIT from Hold to Add as its FY2021-2023 DPU yield of c.4% is now more palatable while its acquisitions could gather pace given its expanded investment mandate and the ROFR on five assets in Guangdong, “ they explain.

Eing and Lock anticipate a stronger second half of the year for the REIT driven by new acquisitions, asset enhancement initiatives (AEIs) and development completion.

For PhillipCapital analysts Natalie Ong, competition for assets appears stiff, indicating cap rates may further compress, though she notes the low cost of debt still leaves room for accretive acquisitions.

To t hat end, she has upgraded her call for Keppel DC REIT from "accumulate" to "buy on the residlient data centre demand and new data centre pipeline.

"There are market rumours that Singapore’s moratorium on data centres may be lifted this year. Should it happen, supply could increase over the next 2-4 years. However, stickiness of data-centre tenants and Keppel’s track record as a data-centre operator should help it retain tenants," she remarks.

She has kept her estimates for the FY2021 unchanged, including her $500 million acquisition assumption. "Keppel DC REIT’s acquisition of Guangdong Data Centre comes one quarter earlier than expected and is above our NPI yield forecast, though at a lower quantum. Still, we leave our estimates for the year unchanged," she comments.

For the research team at OCBC, their lower target price also reflects the potential competition for assets. "After factoring in an ESG valuation premium but lowering our terminal growth rate assumption by 25 basis points to 2.75% to account for an increasingly competitive landscape for inorganic growth, our fair value estimate declines from $3.32 to $3.19," the team explains.

As at 2.05pm, units in Keppel DC REIT are up 4 cents or 1.56% higher at $2.60.

Photo: Keppel DC REIT

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