SINGAPORE (Apr 17): OCBC Investment Research and Phillip Capital are reiterating their “hold” and “neutral” calls on Keppel DC REIT with a fair value estimate and target price of $1.50 and $1.47, respectively.
The research houses of DBS and CIMB, on the other hand, are more positive on the REIT with their respective unchanged “buy” and “add” calls, as well as target prices of $1.60 and $1.47.
This comes after the REIT manager on Monday declared a 1Q18 distribution per unit (DPU) of 1.80 cents, down 4.8% from its 1.89 cents DPU a year ago on higher expenses.
Rich valuations
In a Tuesday report, OCBC lead analyst Andy Wong says that although he remains constructive on Keppel DC REIT’s long-term outlook, he does not find its current valuations appealing, given its FY18 distribution yield of 5.3% and price-to-book ratio of 1.5 times as at its last closing unit price of $1.46.
He further highlights the REIT’s higher aggregate leverage ratio of 37.4% following its acquisition of its maincubes Data Centre in Germany this year, which signals potential dilution risks in the near future.
While OCBC has raised FY18 DPU forecasts by 2.1% to assume higher contributions from maincubes, the research house has lowered its FY20F-FY22F DPU projections by 0.7%-1%.
This is to factor in higher borrowing costs from the remainder of a 999-year leasehold land interest in Keppel DC Dublin 1 for an agreed value of 30 million euros, of which legal completion is expected in 1H20, explains Wong.
Similarly, Phillip Capital analyst Richard Leow opines that the REIT’s valuations appear rich at an implied 1.44 times FY18E P/NAV multiple. He nonetheless underscores the REIT’s stable outlook with a long WALE and manageable renewal risk, in his view, with effectively no more debt maturing in 2018.
Strong acquisition potential
With contributions from maincubes DC to commence from 2Q18, DBS lead analyst Derek Tan thinks consensus figures have not factored in acquisitions that can drive the REIT’s earnings higher than expected.
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“Our DPU estimates of 7.68 cents and 8.1 cents [for FY18 and FY19, respectively] are the highest in the street,” says Wong.
“In our forecast, we assumed acquisitions of $300 million by end-2018, funded by debt/equity (40%/60%) mix. This will bring assets under management (AUM) to $2 billion by end-2018, a target that should be achievable given a myriad of opportunities that the manager is reviewing. Our TP of $1.60 leads the market on the back of these assumed acquisitions,” he explains.
Meanwhile, CIMB lead analyst Yeo Zhi Bin says he continues to like Keppel DC REIT for its exposure to the positive fundamentals of data centres as well as acquisitive growth, with potential re-rating catalysts being accretive acquisitions.
Yeo has however cut FY18-20 forward DPU estimates by 3.2-4.7% to reflect adjustments in the distribution line and higher minority interests, resulting in a lower target price of $1.47 from $1.52 previously.
As at 11.39am, units in Keppel DC REIT are trading 2 cents lower at $1.44, representing a FY18 DPU yield of 5.23% based on OCBC’s estimates.
