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Keppel DC REIT likely to see higher DPU ahead on acquisition-led growth, says CGS-CIMB

Stanislaus Jude Chan
Stanislaus Jude Chan • 3 min read
Keppel DC REIT likely to see higher DPU ahead on acquisition-led growth, says CGS-CIMB
KDCREIT is likely to continue to see growth on the back of acquisitions. But are current valuations looking steep?
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SINGAPORE (Jan 22): Keppel DC REIT (KDCREIT) on Jan 21 reported a 20.4% increase in distributable income to unitholders to $31.5 million for 4QFY2019 ended December 2019, bringing full-year distributable income to $113.2 million for FY2019, some 17.8% higher than a year ago.

The increase was supported by the acquisitions of Keppel DC Singapore 4 (SGP4) and 1-Net North Data Centre (DC1), which were completed in 4QFY20019, as well as full year contributions from Keppel DC Singapore 5 and maincubes Data Centre in Offenbach am Main, Germany.

The way market watchers see it, KDCREIT is likely to continue to see growth on the back of acquisitions.

In a report on Jan 21, CGS-CIMB Research notes that KDCREIT’s “acquisition momentum” continues with its recently-announced acquisition of a 540,869 sq ft data centre in Kelsterbach, Germany for €81.8 million ($125.3 million).

“The shell and core data centre is KDCREIT’s second data centre in Germany and will be its largest data centre in its portfolio by lettable area,” says lead analyst Lock Mun Yee.

She highlights that the property is leased on a triple-net basis until end-2025.

See also: UOBKH lowers MINT’s TP to $2.93 after its data centre JV’s all-in cost of debt to increase after January expiry

Expected to be completed in 2020, the acquisition is likely to be fully debt funded.

Already, KDCREIT’s aggregate leverage had inched up to 30.7% as at end-December, from 28.9% in 3QFY2019, as a result of the acquisitions of SGP4 and DC1.

However, Lock opines that KDCREIT’s aggregate leverage is still low despite the acquisitions.

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“Average cost of debt remained at 1.7% while debt tenor was 3.9 years,” Lock says. “According to KDCREIT, it has debt headroom of more than $400 million before reaching its internal 40% gearing limit; this would be used for asset enhancements at SGP5 and DC1 to optimise portfolio returns.”

On the other side of the coin, KDCREIT saw its distribution per unit (DPU) in 4QFY2019 dented by equity fund raising, by way of a private placement and a pro-rata preferential offering, to partially fund the acquisitions of SGP 4 and DC1.

4QFY2019 DPU dipped 1.1% to 1.83 cents, from 1.85 cents a year ago. This brought FY2019 DPU to 7.61 cents, some 4.0% higher than DPU of 7.32 cents in FY2018.

Excluding the impact of the pro-rata preferential offering in October 2019 of approximately 0.10 cents per unit, the adjusted DPU for 4QFY2019 would have been up 4.3% y-o-y at 1.93 cent and FY2019 DPU would have been 5.3% y-o-y higher at 7.71 cents.

Lock is forecasting a 4.6% to 8.5% increase in DPU for FY2020 to FY2021. As a result, the brokerage is increasing its target price for KDCREIT to $2.03, from $1.88 previously, despite keeping its “hold” recommendation.

“We continue to view the data centre industry positively due to its future-ready characteristics and limited supply; however, we think that current valuations (at 4.2% FY2020F yield and 2.0 times P/B) are steep (at more than 2 standard deviation above historical mean),” Lock says.

As at 2.20pm, units in Keppel DC REIT are trading half a cent lower, or down 2.2%, at $2.20.

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