CGS-CIMB and DBS Group Research analysts observe upbeat FY2021 earnings reported by Keppel DC REIT (KDC), driven by acquisitions, AEIs, and higher occupancy rate.
However, for CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee, they’ve lowered their target price on this stock to $2.70 from $2.78 previously, to take into account higher cost of equity assumptions in view of the increasing interest rate environment.
The analysts, who are keeping their “add” call on KDC, noted that its FY2021 revenue increased 2.1% y-o-y to $271.1 million, driven by asset enhancement initiative contributions from Dublin and Singapore assets, full-year contribution from Kelsterbach and Amsterdam DC, as well as the acquisitions of Eindhoven and Guangdong DC.
The revenue growth was partially offset by the cessation of excess rent paid to the vendor at Kelsterbach DC, the divestment of iseek DC and absence of one-off revenue and expenses reduction from Singapore colocation assets.
Moreover, Eing and Lock notes that portfolio occupancy was 98.3%, the highest since its listing in Dec 2014, while WALE lengthened from 7 years to 7.5 years, enhancing income stability.
“We note that rental reversion in 2021 was stable, and we expect KDC to continue to deliver stable rental reversions in FY2022, as it continues to see strong demand for data centres,” say Eing and Lock.
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“Some 18.7% of its leases by rental income are due to expire in 2022. While the potential lifting of the moratorium on new data centres in Singapore would introduce more supply, it would take time for new data centres to be built, and we believe the firm demand and strong stickiness of tenants would continue to support KDC’s rental income.”
Eing and Lock also point out that being in line with the strong demand for data centres globally, KDC’s portfolio continues to experience cap rate compression (Asia Pacific: from 5.25%-10.12% in 2020 to 5.25%- 8.75% in 2021; Europe: from 4.95%-8.26% to 4.4%-9.31%).
“Despite this, we believe KDC is in a good position to acquire yield-accretive assets, given its relatively low cost of funding,” say the analysts. “We understand its focus will be on larger acquisitions for more meaningful impact on its growing portfolio. KDC’s gearing remains healthy at 34.6%, which provides sufficient debt headroom for inorganic growth.”
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DBS Group Research analysts Dale Lai and Derek Tan also maintain a ‘buy’ rating on KDC with a revised target price to $2.80 from $3. “As a prudent step, we have revised the long-term cost of borrowings for KDCREIT up to 2.0% to account for any potential increase in borrowings costs. This led a slight increase in KDCREIT’s weighted average cost of capital to our current projection of 5.8%,” they reason.
According to Lai and Tan, DPU is expected to grow by a compound annual growth rate of approximately 6% from now till FY2023, driven by recent acquisitions, organic growth from past AEIs and developments, and further potential acquisitions by the end of FY2022. “Given its debt headroom, we have assumed $300 million worth of acquisitions at an implied yield of approximately 5% by the end of FY2022 in our estimates,” say the analysts.
“KDC's current portfolio occupancy of more than 98% is the highest since its IPO in 2014,” Lai and Tan note. “The continued strong demand for data centre capacity amid the prolonged Covid-19 outbreak and rise of the digital economy would support higher occupancies and revenues across its portfolio in the foreseeable future.”
In addition, OCBC Investment Research analysts note that KDC’s portfolio valuation uplift boosted NAV/unit by 12.6%, where KDC recorded a revaluation gain in its portfolio by $151.4 million due to improvement in occupancy and compression in cap rates, while maintain a ‘buy’ rating on KDC. “This helped to boost its NAV/unit by 12.6% to $1.34 as compared to end-FY20 level, and its aggregate leverage declined by 0.5 ppt to 34.6%, with an unchanged average cost of debt of 1.6%,” say the analysts. “Management has fixed/hedged 74% of its borrowings, with its remaining floating debt denominated in EUR.”
Citi Investment Research analyst Brandon Lee maintains that a ‘neutral’ rating for KDC with a target price of $2.75. “In view of its rising cost of capital, 3rd-party DC assets remaining at elevated pricing and its reluctance to explore higher-yielding greenfield/brownfield projects, accompanied with leasing and development risks, we think it could be challenging for KDC to replicate its 5 year NAV/DPU compound annual growth rate of 7/10%,” says Lee. “KDC has underperformed S-REITs y-t-d, but at FY2022 yield of 4.6% and 1.7x P/B amid a more difficult acquisition landscape, we see better value in Frasers Logistics & Commercial Trust (5.5% yield; 1.2x P/B) among industrial S-REITs.”
Some risks that the analysts consider include competition from larger third-party data centre players. “KDC may face higher barriers to entry and stiffer competition from international operators/funds that are also looking to grow their footprint and attract tenants,” they add.
