SINGAPORE (Mar 11): KGI Securities has downgraded Keppel DC REIT (KDCREIT) to “neutral” from the previous “outperform” recommendation with an increased target price of $2.19, representing a downside of 7.3% for the stock. 

In a Tuesday report, analyst Kenny Tan views KDCREIT as “fully valued” and pales in comparison to “better opportunities” in the current market. 

To be sure, the REIT booked a distribution per unit (DPU) of 7.71 cents for FY2019 ended December, a 5.3% jump from FY2018’s DPU of 7.32 cents. This was despite additional unit offerings from the REIT, and was largely in line with the brokerage’s forecasts. 

However, KDCREIT’s revenue for the year came in at $195 million, missing forecasts by some 2.5%. 

Amid mixed topline figures, Tan notes that the REIT has displayed improvements in its operating statistics. Portfolio occupancy was lifted to 94.9% from 94.1% during its September acquisitions of SGP 4 and 1-Net North DC. Weighted average lease expiry (WALE) was down to 8.6 years from 8.9 years in the preceding year. 

However, Tan says that these improvements could be marred slightly in the near future. “While rental reversions are likely to be positive for individual leases, we expect average rent psf to fall in the future, diluted by 1-Net North DC and Kelsterbach DC,” says Tan. 

Looking  ahead, FY2020 is set to be a relatively quiet one for KDCREIT as its main sponsor, Keppel Telecommunications and Transport, is unlikely to deliver any projects. 

“We think Keppel DC Johor 1, which will be leased out to a single cloud giant tenant, can be a reasonable divestment in 2HFY2020 upon construction completion,” says Tan. 

KDCREIT will also have to grapple with compressing cap rates. Tan notes that Kelsterbach DC in Germany was acquired at an implied 6.5% cap rate, or at the lower end of the REIT’s portfolio. 

“Cap rates continue to compress in an increasingly competitive environment, with KDC REIT’s property portfolio’s cap rate targets reduced from 5.75 - 10.75% in FY2018 to 5.5 – 10.25% in FY2019,” shares Tan. 

“While current gearing ratio of 30.7% is healthy, management has indicated interest in maintaining a 30-70 debt-equity ratio,” he adds. 

Nonetheless, the brokerage remains optimistic that on KDCREIT’s data centre investments despite recent concerns about supply chain disruptions and stock market weakness from COVID-19 fears. 

Tan, for one, says that the data centre theme remains relevant with intact supply chains, and this has in turn provided support to the REIT’s unit price despite heavy sell-offs in the recent weeks. 

“We remain confident of data centre trends, where data management will continue to consolidate towards hyperscalers and their private/public cloud infrastructures,” says Tan. 

“While 2019 was a year of slower growth of enterprise-level data centres, 2020 is set to be the year for rebound,” he adds. 

Year-to-date, KDCREIT’s unit price has risen 11%. At its current price, KGI believes that the stock has reached a fair valuation. 

“While the data centre industry remains an attractive investment thematic, we think the sub 4% dividend yield of KDCREIT signals a fair valuation for its current share price,” says Tan. 

As at 11.40am, units in Keppel DC REIT are trading seven cents lower, or 2.9% down, at $2.31.