PhillipCapital analyst Natalie Ong has upgraded her recommendation on Keppel DC REIT to “accumulate” from “neutral” with a higher target price of $3.20 from $2.91 previously.
“Our dividend discount model (DDM)-based target price has been raised to reflect higher occupancy and asset productivity following asset enhancement initiatives (AEI), which raises our net property income (NPI) by 6.9% on a same store basis (excluding any acquisition assumption),” Ong writes in a Feb 1 report.
“Our previous target price of $2.91 assumes that Keppel DC REIT will make $500 million of acquisitions in 1QFY2021e (NPI yield 6% and loan-to-value or LTV 30%). In this report, we push back our $500 million acquisition assumption (NPI yield 6% and LTV 30%) from 1QFY2021 to 4QFY2021.”
Keppel DC REIT, on Jan 26, declared 20.5% higher distribution per unit (DPU) y-o-y for the FY2020 at 9.17 cents, coming in line with Ong’s expectations at 97.1% of her estimates.
See: Keppel DC REIT’s DPU surges 20.5% in FY2020, manager plans to continue with acquisitions
The REIT’s portfolio occupancy improved 1.1 percentage points q-o-q to 97.8%, and 2.9 percentage points y-o-y compared to 94.9% in FY2019.
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The higher occupancy in 4QFY2020 stemmed from the handover of newly converted data centre space at KDC5, tenant expansion at KDC1, as well as the inclusion of a new tenant at KDC2.
The way Ong sees it, the demand-supply gap will drive market rents upwards, benefitting the REIT.
Singapore is Keppel DC REIT’s core market, accounting for 56% of its assets under management (AUM).
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“Given the moratorium on data centres in Singapore, we expect market rents to be bid up in the coming two years. Present higher demand has led to higher occupancy for Keppel DC REIT’s portfolio, though market rents have not moved,” she says.
“While Keppel DC REIT’s portfolio occupancy in Singapore is high at 97.0%, Colocation leases in Singapore have weighted average lease expiries (WALEs) of 1.4-4.0 years. These coincide with expected rent appreciation.”
“In the meantime, Keppel DC REIT is expected to benefit from organic growth as many of its leases have built-in periodic rental escalations averaging 2-4% per annum,” she adds.
Based on her acquisition assumptions for the REIT, Ong has reduced FY2021 DPU by 5.4% due to an enlarged share base, but has upped FY2022 DPU by 5.3%.
The demand for data centres is supported by the increasing use of 5G, smartphone and cloud adoption, she says.
“Keppel DC REIT’s higher price-to-net asset value (P/NAV) of 2.4 times is supported by the forecast growth in data centres and its ability to deliver earnings growth through AEI, rental improvements and accretive acquisitions,” she adds.
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“We forecast DPU yields of 3.3%/3.8% for FY2020e/2021e, which should deliver a forward yield spread of 220 basis points, the average of its five-year historical yield spread over 10YSGS.”
As at 10.14am, units in Keppel DC REIT are trading 6 cents lower or 2.0% down at $2.92.
