DBS Group Research analysts Dale Lai, Geraldine Wong, Derek Tan and Rachel Tan have upgraded their rating on Keppel DC REIT (KDC REIT) to “buy” with a target price of $3, after it announced “surprise acquisitions”.
They highlight that the announcement of the acquisition of Guangdong Data Centre and the right of first refusal (ROFR) granted for the other five data centres within the campus has reignited optimism on KDC REIT’s growth trajectory.
At the current share price and its relatively low weighted average cost of capital (WACC), the analysts are of the view that acquisitions should be “highly accretive”.
They think that KDC REIT’s distribution per unit (DPU) is expected to grow by a CAGR of about 8% from now till FY2023, driven by recent acquisitions, organic growth from AEIs and developments, and further potential acquisitions by the end of FY2022.
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The analysts do add though, that their thesis is on the assumption of acquisitions of about $300 million in 2HFY2022 in addition to the M1 network assets investment.
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Furthermore, they note that KDC REIT's latest portfolio occupancy of 98% is the highest since its IPO in 2014.
“The continued 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,” the DBS analysts say.
However, the analysts have highlighted some key risks for KDC REIT, including competition from larger third-party data centre players.
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KDC REIT may face higher barriers to entry and stiffer competition from international operators or funds which are also looking to grow their footprint and attract tenants.
With the strong fundamentals and growth projections for data centres, they are increasingly seeing investors competing for assets in the industry.
However, CGS-CIMB’s analysts Eing Kar Mei and Lock Mun Yee have also maintained their “add” call on KDC REIT, but lowered their target price from $2.84 to $2.78.
While they broadly agree with the DBS analysts, the lowered target price was due to them trimming their FY2021-2023 DPU forecasts by 2-3%, mainly to factor in the divestment of Iseek Data Centre in Brisbane, Australia.
Eing and Lock note that portfolio occupancy remained stable at 98.1% in 3QFY2021, and add that weighted average lease expiry (WALE) lengthened from 6.5 years to 7 years, due to the commencement of a 20-year lease at Intelligence Campus in July.
KDC REIT saw healthy renewal and expansion of leases with existing clients in 3QFY2021. It has a remaining 0.4% of its leases by rental income expiring in 2021, and has started discussions with its clients for contracts expiring in 2022.
Some 18.8% of its leases by rental income are due to expire in 2022, and they expect occupancy to remain stable in 2022 given the strong demand and stickiness of data centre tenants.
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They say that KDC REIT has access to Keppel T&T and Keppel’s pipeline of private data centres worth over $2 billion. In addition, its gearing of 35.1% as at end-3QFY2021 provides it with ample flexibility to boost its inorganic growth.
As such, they are still optimistic about the REIT, as it could continue its accretive acquisitions, and accelerate its pace of acquisitions given its healthy gearing and relatively low cost of funding.
For them, some potential re-rating catalysts include more accretive acquisitions, while downside risks include lower-than-expected rental reversions.
Separately, Citibank analyst Brandon Lee has a less optimistic view, handing the REIT a “neutral” rating and a target price of $2.75.
He says that although KDC REIT has announced $0.3 billion of acquisitions year-to-date (y-t-d), and existing gearing of 35% implies adequate debt headroom of $0.3-0.6b for future acquisitions, “we believe investors are looking for greater DPU-accretion than the 1-4% achieved for its past few transactions.”
Lee also says that while KDC REIT has underperformed S-REITs and its industrial peers y-t-d, he believes valuations have yet to turn compelling at 1.95x P/B and FY2021 yield of 4.2-4.3%, and with the forward 3-year DPU CAGR at about 4%.
The positives, Lee says, was the high occupancy, and 3QFY2021 saw healthy renewal and expansion of leases with existing clients, “evidenced by lease expiries by rental income for the remaining part of FY2021 falling significantly from 7.6% in 2QFY2021 to just 0.4% this quarter.”
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He thinks the majority of renewals were done within the colocation data centres in Singapore, which should continue to perform well in light of ongoing moratorium on building new data centres.
On the other hand, he notes that completion of Guangdong data centre’s acquisition is delayed from initially-expected 3QFY2021 to 4QFY2021, and expects muted share price performance given traditionally limited disclosures in 1Q and 3Q operational updates.
As at 4.50 pm, units of KDC REIT traded at $2.38, with an FY2021 price to book ratio of 1.91 and dividend yield of 4.09%.
