Analysts from CGS-CIMB Research, Citi Research, DBS Group Research and OCBC Investment Research are mixed following Keppel DC REIT’s results for the 1HFY2022 ended June.
The REIT reported a distribution per unit (DPU) of 5.049 cents, 2.5% higher y-o-y for the half-year period on July 25.
CGS-CIMB and DBS Group Research have kept their “add” and “buy” calls while Citi and OCBC Investment Research have kept their “neutral” and “hold” calls.
CGS-CIMB analyst Lock Mun Yee is the most optimistic on the REIT’s prospects.
The analyst also maintained her target price of $2.63, the highest among the four brokerages here.
Her DPU estimates for the FY2022 to FY2024 have also remained unchanged.
To her, the REIT’s DPU stood in line with her estimates at 49.7% of her full-year forecast.
The REIT’s portfolio metrics also remained “robust”, in her view.
“We think that tenant stickiness due to the high cost of relocation and limited supply in the near-term in KDC’s key markets will continue to underpin income resilience and positive reversions,” she writes.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
In her report, Lock sees a faster pace of acquisitions as a potential re-rating catalyst for the REIT. Downside risks include a larger-than-expected impact from higher electricity costs.
DBS analysts Dale Lai and Derek Tan have also kept their target price estimate unchanged at $2.50, with the REIT’s 1HFY2022 results ahead of their projections.
This is mainly due to the accretive acquisitions made by the REIT in 2021.
“Amid record-low cap rates for data centres globally, Keppel DC REIT continues to deliver acquisitions that are accretive to DPU,” the analysts write.
“Following acquisitions in Amsterdam, Guangdong, and London in FY2021, KDC REIT just announced another two in Guangdong valued at more than $320 million. These accretive acquisitions should add to earnings in addition to organic growth within its existing portfolio,” they add.
In their report, the analysts acknowledge that the REIT may face near-term challenges such as higher utility costs and rising interest rates, the REIT’s fundamentals still remain positive.
“Although accretion from recent acquisitions have been eroded by higher operating costs, we believe the bulk of the impact is already factored into the current share price,” they say. “Going forward, growing demand for data centres and positive fundamentals in the sector will help Keppel DC REIT return to its organic growth path.”
For more stories about where money flows, click here for Capital Section
In addition, the current market dynamics is supportive to the REIT’s growth.
As at June 30, the REIT’s portfolio occupancy of over 98% is the highest since its initial public offering (IPO) in 2014.
“The continued strong demand for data centre capacity amid the prolonged Covid-19 outbreak and rise of the digital economy would support higher occupancies and revenues across its portfolio in the foreseeable future,” say DBS’s Lai and Tan.
To this end, the analysts expect the REIT’s DPU to continue growing despite the assumption of $92 million in equity fund-raising in FY2023 to fund the remaining payment for Guangdong DC 3.
However, the analysts are also quick to note that the REIT may face higher barriers to entry and stiffer competition from larger third-party data centre players.
Citi Research analyst Brandon Lee has kept his “neutral” call on Keppel DC REIT with an unchanged target price of $2.40.
To him, the REIT’s results for the 2QFY2022 showed “partial operational weakness” in the form of lower q-o-q occupancies, albeit mitigated by positive rent reversions.
Keppel DC REIT’s DPU for the 2QFY2022 missed Lee’s estimates slightly due to the provisions made for DXC Technology Services and higher electricity costs.
“The group appears keen to acquire more assets in APAC and Europe (despite still-tight cap rates), which are likelier to come from third-parties (including off-market deals) given Sponsor’s pipeline still in the midst of stabilisation,” Lee writes.
“While KDCREIT is open to funding its recently announced two China data centress fully by debt, we think the resultant gearing of [around] 40%, its proactive hunt for further acquisitions and still-decent weighted average cost of capital (WACC) of 4.4% could result in some form of equity fund raising to maintain gearing at the mid-point of its optimal 30-40% level,” he adds.
Furthermore, Lee sees “decent shelter from higher utilities cost (90% pass-through for its colocation assets) and year-to-date (ytd) share price underperformance (-19% vs. S-REITs’ -5%)”.
In view of the lower occupancies, Lee says the REIT is likely to see a “partial” downside in its share price.
The research team at OCBC Investment Research has lowered its fair value estimate to $2.04 from $2.28 previously. The team’s fair value estimate is the lowest among all four brokerages here.
The lower fair value estimate comes in spite of the REIT’s results coming in line with the team’s expectations.
Furthermore, the team sees the REIT as a “strong proxy” to the growing demand for data centre space, underpinned by increasing digitalisation and cloud adoption trends.
It adds that Keppel DC REIT’s tenants come from fast-growing industries such as internet enterprise, information technology services, telecommunications and financial services. The REIT is also one of the most defensive REITs given its long weighted average lease expiry (WALE) of 7.6 years by leased area and 5.1 years by rental income, notes the team.
However, the team also notes that the REIT’s enlarging its footprint in China will come with higher credit and concentration risks.
“Although the two proposed acquisitions [in China] would be master leased to Bluesea on a triple-net basis for 15 years, we are more concerned over the credit standing of Bluesea, which is an entity of HK-listed Neo Telemedia,” the team writes.
“We note that Neo Telemedia reported a net loss of HK$71.4 million ($12.6 million) in FY2021, had a net gearing of 172%, and all its borrowings (HK$1.8 billion) were classified as current liabilities, as at Dec 31, 2021,” it adds.
“Post-completion of these proposed acquisitions, we estimate that Bluesea would become Keppel DC REIT’s second largest tenant and would account for a low-teens percentage of its net property income (NPI),” continues the team. “One mitigating factor though, is that the assets are, or would be sub-leased to other end-users such as telco operators.”
Further to its report, the OCBC team has upped its DPU forecast for the FY2022 by 0.4%. It has, however, lowered its DPU projections for the FY2023 by 1.7% to factor in higher interest costs.
“We also increase our cost of equity assumption from 6.5% to 6.9% due largely to a higher risk-free rate assumption of 3.25%. Correspondingly, our fair value estimate declines from $2.28 to $2.04,” they explain.
Units in Keppel DC REIT closed 1 cent lower or 0.50% down at $2.01 on July 27.
