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DBS keeps 'buy' call and 90 US cents target price on Digital Core REIT

The Edge Singapore
The Edge Singapore2/3/2023 05:50 PM GMT+08  • 3 min read
DBS keeps 'buy' call and 90 US cents target price on Digital Core REIT
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DBS Group Research analysts have kept their “buy” call and 90 US cents target price for Digital Core REIT, even though FY2022 earnings came in short of forecasts made when it listed in late 2021.

Due to lower distributable income, distribution unit was below forecast too. Portfolio occupancy of this data centre REIT declined, and there was a slight valuation loss too.

Nonetheless, in their Feb 3 note, analysts Dale Tan and Derek Tan maintain that they are “positive” on Digital Core REIT, mainly because the REIT was able to replace the space vacated by previous tenant SunGard at a property at Toronto, at a faster pace than expected.

“Although only approximately half of the space has been backfilled, we understand that demand in Toronto remains firm, with rents still on an uptrend.

“Also, demand and rents in Frankfurt also continue to grow, and we expect the Frankfurt data centre to report improved occupancy in the coming quarters,” note the Tans, referring to another data centre held by the REIT.

Digital Core REIT owns 11 data centres worth US$1.5 billion.

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For FY2022 ended Dec 2022, distributable income was US$44.8 million, which was 5.8% below what the REIT forecasted at time of its IPO.

The REIT reduced trust expenses but the dip could not fully offset higher borrowing costs of around US$5.4 million.

Distribution per unit for 2HFY2022 was 1.92 US cents, 8.1% lower than 2.09 US cents paid for 1HFY2022. Full year DPU of 3.98 US cents was 4.8% below forecast.

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DPU was somewhat supported by share buyback of some 10.7 million units, leading to an accretion of 0.04 US cents.

The REIT’s manager, according to the DBS analysts, will continue to consider buybacks as a tool to generate accretion but such a move will be weighed relative to gearing and debt headroom.

“There is no denying that the higher interest rates will continue to put downward pressure on earnings in the coming year, but Digital Core REIT has proven that they are able to improve earnings and have some cost savings, which helps to partially buffer the higher financing costs,” the analysts note.

They estimate that Digital Core REIT will see a further 7% dip in its DPU for FY2023 because of higher financing costs, this forecast might change depending on whether there are further share buybacks made or if accretive acquisitions are executed.

“As such, we will be maintaining our ‘buy’ recommendation with a target price of 90 US cents,” write the Tans.

In his Feb 6 note, UOB Kay Hian's Jonathan Koh has maintained his "buy" call and 97 US cents target price as he deems the FY2022 numbers, while slightly short of the forecasts at time of IPO, are in line with his expectation.

Koh observes that the REIT has created value with its buybacks, which amounted to 10.7 million units so far. At the average price of 58.5 US cents, the buybacks were made at 30% discount to the REIT's net asset value. The buybacks delivered a 1% lift in distribution per unit but only added 0.4 percentage points to its aggregate leverage, says Koh.

As at 11.44 am on Feb 6, Digital Core REIT traded at 64 US cents.

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