CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee are maintaining their “hold” recommendation on Keppel DC REIT (KDC REIT) with an unchanged target price of $2.88 following the release of its 3QFY2020 results.
See: Keppel DC REIT posts 22.1% rise in DPU to 2.357 cents in 3Q update
“Covid-19 has fuelled further demand and underpins the importance of data centres, but we believe the impact of this on KDC REIT has been priced in. The stock is trading at 3.5% FY21F DPU yield vs. sector average of 5.5%,” they write in a report dated Oct 20.
On Oct 20, KDC REIT posted a 22.1% y-o-y rise in distribution per unit (DPU) to 2.357 cents, primarily due to the new acquisitions by the REIT, including the Kelsterbach Data Centre acquisition in May 2020.
For the nine-month ended September, KDC REIT reported DPU of 6.732 cents, which came within Eing and Lock’s expectations at 71% of their full-year forecast.
Overall portfolio rental reversion in 3QFY2020 was largely neutral.
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“We expect rental rates to remain stable in the near term, supported by increasing demand,” add the analysts.
Looking ahead, KDC REIT has a few ongoing asset enhancement initiatives (AEIs), including the recent completion of AEI works at Dublin 1.
AEI works for the REIT’s Intellicentre 3 East Data Centre (IC3 East DC) in Sydney, as well as Keppel DC Singapore and Keppel DC Dublin 2 are on track for completion 1H2021.
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While these projects are slated for completion in 1H2021, the REIT has already secured customers for the additional data centre space.
“On the acquisition front, we understand that KDC REIT is hoping to finalise a deal as soon as possible,” say Eing and Lock.
“The REIT continues to evaluate a wide range of deals including assets abroad with cap rates in the range of 4- 7%. As its sponsor’s assets will not be ready in 2020, acquisitions in 2020 will be from third-parties. KDC REIT’s gearing remains low, at 35.2% as at end-3Q20; this gives it substantial financial flexibility for acquisitions,” they add.
The research team at OCBC Investment Research (OIR) on the other hand, has given KDC REIT a “buy” rating with an increased fair value estimate of $3.41 from $3.32, on the REIT’s 3QFY2020 DPU performing “slightly above” the team’s expectations.
OIR’s team also views KDC REIT’s operational metrics for the quarter as solid.
In its update, KDC REIT reported a portfolio occupancy of 96.7%, representing a 0.6 percentage point increase q-o-q.
The improved occupancy rate was driven largely by Keppel DC Dublin 1, which secured a new client and thus boosted the property’s occupancy by 17.8 percentage points to 81.1%.
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On that, the team has also upped its DPU forecasts for FY2020F and FY2021F by 3.6% and 2.6% respectively.
“KDC REIT’s proactive leasing efforts and robust industry outlook has led to a further ramp up in its portfolio occupancy rate after the quarter end, underpinned by Keppel DC Singapore 1 (+1.8 percentage points to 91.0% due to client expansion) and Keppel DC Singapore 2 (+4.7 percentage points to 98.2% due to new client),” it says in an Oct 21 report.
In its earlier report dated Oct 5, the team previously flagged KDC REIT’s potential inclusion into the Straits Times Index (STI) as a re-rating catalyst.
On Oct 19, the REIT was inducted into the benchmark index.
See also: Keppel DC REIT to be included in STI from Oct 19
The team says it now awaits acquisitions as the next catalyst for the REIT’s share price.
“Management highlighted that it continues to work hard on this front, with the main impediment being delays caused by the Covid-19 pandemic. It continues to see market cap rates ranging from 4.5-7%, but we believe acquisitions by KDC REIT would likely come in closer to the 6% handle,” says the team.
“While cap rates have compressed in the industry, we understand that vendors that KDC REIT had been in negotiation with have not raised their asking prices.”
“In terms of outlook, KDC REIT sees potential rental rate hikes in the next two years, especially in countries with low upcoming supply such as Singapore, Ireland, Germany and the Netherlands," adds the team.
Units in KDC REIT closed flat at $3 on Oct 23.
