SINGAPORE (Jan 23): DBS Vickers Securities is maintaining “buy” on Keppel DC REIT (KDC REIT) while raising its target price from $1.52 to $1.60, which is the highest on the street, after the REIT’s 4Q18 results came in line with the research house’s expectations.
The higher target price accounts for the recent positive tax transparency status for the trust’s stake in KDC SGP5, with its discount rate reflecting a refreshed 3% 10-year risk-free rate and a 50-bp increase in funding costs.
In a Wednesday report, analyst Derek Tan says he believes KDC REIT’s conservative gearing of 31% provides it with ample gearing capacity to fund opportunistic acquisitions as the REIT remains among one of the few in Singapore capable of making accretive acquisitions, supported by low cost of capital.
With that as an upside, he projects the REIT to deliver 3-5% growth in distributions and expects higher revenues in the medium-term as KDC SGP 5 ramps up its operations.
KDC SGP 5 is expected to deliver an initial yield of 7.8% from 2H19.
“With limited expiries in the coming two financial years, there is high income visibility – a valued trait in the current volatile climate,” says Tan.
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Nonetheless, the analyst remains cognisant of KDC REIT’s risk of facing higher barriers to entry and stiffer competition in attracting and retaining tenants.
This is especially so considering how large international operators have been aggressively expanding into data centre markets where the REIT has a presence.
“Being a data centre manager, KDC REIT is a niche player in the sector and does not have much flexibility in terms of asset type diversification. Any newsflow related to data centre outlook could directly impact the REIT’s price performance,” he cautions.
As at 11:35am, units in KDC REIT are trading 1 cent higher at $1.45 or 17.9 times FY19F book value.
