Analysts are remaining positive on Keppel DC REIT’s set of results for the 1HFY2023 ended June 30.
On July 24, the REIT reported a stable distribution per unit (DPU) of 5.051 cents, which came within the expectations of the consensus. For the six-month period, Keppel DC REIT’s gross revenue rose by 3.6% y-o-y to $140.5 million while its net property income (NPI) rose by 3.3% y-o-y to $127.4 million.
“Keppel DC REIT’s portfolio of data centres (DCs) in Asia Pacific (APAC) and Europe continue to benefit from the structural tailwinds of the sector. Its reputation and capability to manage DC assets are reflected in its consistently high occupancy rates,” write DBS Group Research’s Dale Lai and Derek Tan.
“In addition, Keppel DC REIT benefits from the support of its sponsor, which provides it with pipeline assets and DC development capabilities to further grow its portfolio,” they add.
Lai and Tan have kept their “buy” call on the REIT with a higher target price of $2.45 from $2.35 previously. The new target price implies forward yields of around 4.1% to 4.4%, which is in line with the REIT’s historical average.
“Further catalysts to our projections will come from accretive acquisitions as well as a lower-than-projected rise in financing cost, although we note that equity fundraising could be a risk in the near term,” the analysts say, noting that the REIT’s spate of acquisitions has “slowed down notably” due to low cap rates and rising financing costs.
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“As such, we have not priced any acquisition assumptions into our estimates. But with interest rate hikes seeming to have slowed and potentially stabilising, Keppel DC REIT could resume accretive acquisitions in the near future,” they add.
Apart from accretive acquisitions, Lai and Tan see that any asset enhancement initiatives (AEIs) made will also drive the REIT’s earnings for the year.
“For FY23, the full-year contribution from acquisitions will support earnings growth, and the protracted completion of Guangdong DC 3 will lead to a higher income contribution from the asset,” they say.
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That said, a “key risk” in the analysts’ view is that the REIT could look to conduct equity fundraising to partly fund further acquisitions should these resume in the near-term.
Citi Research’s Brandon Lee has kept his “neutral” call with an unchanged target price of $2.16 with the REIT’s latest results painting a “rather positive operational picture”.
“[This is] evidenced by solid portfolio occupancy, positive rent reversions (up to double-digit) and limited tenant concerns at GV7 DC,” he writes. GV7 DC is a carrier-neutral DC that is located in Canary Wharf in London.
“Nonetheless, we believe these are likely already priced into [the REIT’s unit] price performance (+28% vs. Singapore REITs’ (S-REITs) 0% year-to-date) alongside investors’ hunt for artificial intelligence (AI)-oriented real estate proxies,” he adds.
Like his peers at DBS, Lee also believes that “significantly DPU-accretive acquisitions” will be the next unit price catalyst for the REIT, adding that the REIT will only raise equity should there be a major acquisition.
In his report, Lee notes that the REIT’s gearing after the fit-out of Guangdong DC 3 is “manageable” at 38.5%.
At its current unit price, Keppel DC REIT’s valuation appears “fairly priced” at 1.63x P/B and FY2023/FY2024 yields of 4.4% and 4.6% respectively, says the analyst.
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CGS-CIMB Research analysts Natalie Ong and Lock Mun Yee have kept their "add" call on the REIT as they believe that the demand for data centres is bolstered by the growth of generative AI applications and this remains a defensive asset class. As such, they have upped their target price to $2.53 from $2.36 previously.
The REIT's DPU for the 2QFY2023 and 1HFY2023 came in line with their expectations at 24.5% and 49.3% of their full-year estimates.
"[Keppel DC REIT's] top growth mitigated [the] higher interest cost," they note.
In their report, the analysts like the positive reversions seen in the REIT's portfolio while noting that the Cyxtera risk is "benign". The US data centre firm filed for bankruptcy on June 6. The REIT's GV7 data centre in the UK is fully leased to Cyxtera's UK entity accounting for 2.7% of the REIT's NPI for the FY2022. The tenant is remaining current with its rent obligations, add the analysts.
On the REIT's portfolio being a defensive asset class, the analysts have lowered their beta/cost of equity (COE) to 6.7% from 7.0%.
As at 1.34pm, units in Keppel DC REIT are trading flat at $2.27.
