CGS-CIMB Research analysts Eing Kar Mei and Lock Mun Yee positively view Keppel DC REIT’s announcement on April 28 that it plans to invest $87 million in an SPV owned by M1.
See: Keppel DC REIT to invest $87 mil in M1’s network assets
The analysts believe the investment will provide stable returns to the REIT. “Based on our understanding, KDC REIT will receive $11 million per annum (comprising principal and interest) for 15 years from the investment,” they say in an April 28 research note.
Assuming the investment is funded internally, Eing and Lock say this translates to an average return (before transaction costs) of 6% per annum, in line with returns from its previous data centre acquisitions of about 3% - 6%.
They note that the REIT intends to distribute all returns from this investment to shareholders.
The analysts believe that Keppel DC REIT’s investment mandate, which has been expanded to include real estate and assets in the digital connectivity sector, broadens its acquisition opportunities and could strengthen inorganic growth. “The wider mandate will allow the REIT to look at other digital network assets and bundled data centre–digital network assets, rather than just pure data centres,” they say.
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In addition, Eing and Lock view the investment as a positive move for Keppel Corporation as a whole, given that the exercise would enable M1 to unlock the value of its assets and funnel proceeds into new businesses or paring down debt.
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Despite their positive take on the transaction, the analysts are maintaining their ‘hold’ rating and target price of$2.86 for Keppel DC REIT.
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Their DPU forecasts for FY2021 - FY2023 ending December remain unchanged for now pending more details such as transaction fees. “We had previously factored in $300 million worth of acquisition for FY2021 [ending December],” they adds.
They also note that the REIT is trading at less than 4% DPU yield, compared to a peer average of more than 5%.
As at 2.30pm, units in Keppel DC REIT are down 1 cent or 0.37% lower at $2.72.
