On Aug 18, on the surface, valuations of data centres appeared to be given a shot in the arm by the transaction between KKR and Singapore Telecommunications’ (SingTel) Z74 regional data centres (RDC) segment. But this may not be the case.
According to a presentation by SingTel on Aug 23 this year, its Digital Infrastructure Co under which the RDC business is parked, recorded revenue of $72 million, and ebitda of $44 million in 1QFY2024 for the three months ended June, compared to revenue of $273 million and ebitda of $172 million in FY2023.
KKR’s purchase price of $1.1 billion for a 20% stake in SingTel’s RDC, translates into an enterprise value (EV) of $5.5 billion, and an historic EV/Ebitda multiple of 32x for the Digital Infrastructure Co. According to the presentation, 62MW is online, with plans to develop around 200MW. The current capacity of 62MW represents just 31% of total future capacity of 200MW.
Based on the Aug 23 presentation, in 1QFY2024, the utilisation rate for 62MW in Singapore was 99%. The revenue mix is a “balanced” mix from hyperscalers and enterprises.
At present, data centres under construction comprise 58MW in Singapore and 37MW in the region. The data centres are not just for the use of SingTel but third parties as well. According to the presentation, there is strong interest from customers to secure capacity with the first 8MW for the Singapore project signed.
If the rest of the 200MW is developed, and SingTel and its partners can maintain 99% utilisation, then the EV/Ebitda multiple could fall to around 10x. Some analysts reckon a steady state EV/Ebitda would be in the low teens, but this is likely in the future, in CY2027 perhaps.
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According to Morgan Stanley, KKR has the option to “increase its stake to 25% by 2027 at a pre-agreed valuation implying another $275 million”.
So far, Digital Infrastructure Co’s 1QFY2024’s Ebitda hasn’t shown much growth y-o-y. However, the growth capital from KKR could help ramp up RDC growth capacity.
The transaction “implies headline FY2023 EV/Ebitda is 32x versus global DCs trading in the range of 10-20x Ebitda,” notes the Morgan Stanley update. As an example, using Digital Core REIT’s 1HFY2023 results, its EV/Ebitda multiple is just 15.5x.
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Morgan Stanley says SingTel’s RDCs’ Ebitda growth is likely to be higher than global industry average as it aims to increase its capacity. “We expect proceeds to be used as growth capital to help fund RDC’s capacity expansion,” Morgan Stanley says.
In addition to increasing its data centre capacity by an additional 138MW, Digital Infrastructure Co has plans for Paragon, which SingTel describes as “industry's 1st 5G aggregation & orchestration platform”.
Hence, while the SingTel-KKR transaction makes DC REIT’s and other data centre valuations look somewhat cheap, KKR is likely paying for future growth.
