DBS Group Research has initiated “buy” on Digital Core REIT with a target price of US$1.40 ($1.88).
The target price is based on a discounted cash flow (DCF) model with a weighted average cost of capital (WACC) of 5.3% (and a risk-free rate of 2.0%).
“This implies a normalised target yield of 3.6% in the next two years. We have assumed a total of US$750 million in acquisitions over the next two years,” write analysts Dale Lai and Derek Tan in a Jan 14 report.
“Catalysts baked into our valuations are an assumed US$250 million of debt-funded acquisitions in FY2022 and a further assumed US$500 million of acquisitions funded by both debt and equity by FY2023,” they add.
“These are expected to drive a three-year distribution per unit (DPU) compound annual growth rate (CAGR) of 7% during FY2021-2024 and 10-11% above IPO forecasts,” they continue.
Digital Core REIT has a portfolio of fully occupied data centres with a long weighted average lease expiry (WALE) of around 6.2 years, which ensures income stability and visibility, note the analysts.
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Furthermore, the REIT enjoys annual rental escalations of around 2% for its portfolio, which provides for organic growth in its earnings.
Digital Core REIT also has the potential to become one of the largest Singapore REITs (S-REITs) with a strong commitment from its sponsor.
The REIT has been granted rights of first refusal (ROFR) to around US$15 billion worth of data centres around the world.
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In addition, the REIT’s sponsor has a further US$5 billion worth of data centre developments that could potentially be made available to the REIT when completed.
That said, Lai and Tan note that key risks to its view would be the “slower-than-anticipated acquisition growth and a spike in borrowing costs”.
As at 11.45am, units in Digital Core REIT are trading 2 US cents higher or 1.7% up at US$1.20.
