Keppel DC REIT
Price targets:
Citi Research ‘buy’ $2.29
DBS Group Research ‘buy’ $2.20
Morningstar Equity Research ‘three stars’ $2.10
OCBC Investment Research ‘hold’ $2.15
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PhillipCapital ‘neutral’ $2.16
Analysts see Guangdong data centres as key earnings driver
Analysts continue to like Keppel DC REIT (KDC REIT) after the REIT reported a quarterly DPU of 2.501 cents, bringing its 9MFY2024 DPU above the consensus estimate at 77% of its full-year forecast.
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Some analysts, like PhillipCapital’s Darren Chan, are more buoyant about the REIT’s outlook. On Oct 21, Chan upgraded his call on KDC REIT to “neutral” from “reduce” after KDC REIT’s 3QFY2024 DPU achieved 27% of his FY2024 forecast.
“This was due to the exceptionally strong positive portfolio rental reversions, continuing the trend from 2QFY2024. A major contract renewal in Singapore secured a positive reversion of over 40%,” writes the analyst, who has also raised his target price to $2.16 from $1.93.
Morningstar Equity Research analyst Xavier Lee has similarly raised his target price to $2.10 from $1.80 while keeping his rating of “three stars” as KDC REIT’s results beat his expectations.
The OCBC Investment Research team has also kept its “hold” call on KDC REIT with a raised target price of $2.15 from $1.97 after the REIT’s 3QFY2024 results surpassed its expectations due to the earlier-than-expected completion of the data centre acquisition in Japan and the Australian data centre note subscription.
Meanwhile, Citi Research analyst Brandon Lee and the DBS Group Research team have maintained their “buy” calls with unchanged target prices of $2.29 and $2.20, respectively.
Citi’s Lee highlighted that the REIT’s operational updates showcased the strength of Singapore’s data centre sector. The REIT posted its seventh consecutive quarter of positive rent reversions in 3QFY2024, its second straight quarter of positive reversions over 40%.
“KDC REIT has 11.5%/18.1%/9.3% (by rental income) of colocation leases (majority should be in Singapore we think) due for expiry in 4QFY2024/FY2025/FY2026, which we expect continued double-digit reversions for Singapore,” he writes in his Oct 18 note. “[This is] in view of Singapore’s existing tight vacancy of [around] 1% to persist next few years amid limited supply and robust demand.”
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PhillipCapital’s Chan also expects to see positive rental reversions for the 11.5% of leases by gross rental income (GRI) expiring in 4QFY2024, driven by similar levels of colocation renewals in Singapore.
The REIT’s lower cost of debt was also a plus. In 3QFY2024, KDC REIT reported an average cost of debt of 3.3%, down from 3.5% in 2QFY2024. “71% of debt is on a fixed rate, with no debt due in FY2024, with most of the debt expiring from FY2026 and beyond,” Chan notes.
At the same time, KDC REIT’s gearing increased by 3.9 percentage points q-o-q to 39.7% as the REIT took on JPY debt to fully fund the acquisition of Tokyo data centre (DC) 1, which has since commenced contributions.
Meanwhile, rental income from its Guangdong DCs continues to be a “net off” via loss allowances, with an impact of 0.32 cents to the quarter’s DPU. “To date, Bluesea owes over a year in rental income totalling around $26 million. Asset valuations at the Guangdong DCs are likely to be affected by the non-collection of rents,” notes Chan.
The OCBC team has also raised its FY2024 and FY2025 DPU forecast by 2.7% and 1.2% respectively as they adjust the timing of the Tokyo DC acquisition and factor in lower borrowing cost estimates.
They write: “Based on a closing price of $2.22, KDC REIT is trading at a relatively low FY2024 and FY2025 distribution yield of 4.2% and 4.3%, respectively, but we see upside potential with accretive acquisitions likely to come, especially in Singapore from its sponsor.”
Although Morningstar’s Xavier Lee is similarly encouraged by the REIT’s positive rent revision in the period, subsequently increasing his FY2024 to FY2025 DPU by 4.9% to 6.5%, he has lowered his FY2026 DPU estimate by 8.9% on a delayed recovery for its Guangdong DC.
Citi’s Lee notes that KDC REIT is well-positioned to consider acquisitions, with Singapore continuing to be a key strategic market and foundational piece.
“Aside from continuing to be on the lookout in Singapore, KDC REIT will also look at Japan and South Korea. KDC REIT expects some cap rate tightening for some markets (except Japan) following the recent interest rate cuts. However, it has not seen actual transactions that have taken place on an asset-by-asset basis,” he continues.
He notes that in Singapore, the REIT is looking at a cap rate of 6% to 7% with a general land tenure period of 20 to 30 years and is not keen on financial engineering with any form of financial support to be supported by real or committed leases.
For Japan and South Korea, cap rates are respectively at 3% to 4% and mid-5%-to-early-6%.
Lee also sees that the REIT has a fair number of opportunities within its portfolio and is trying to determine how it can procure power globally. — Douglas Toh
Parkway Life REIT
Price target:
Citi Research ‘neutral’ $4
Acquisition could see bigger DPU accretion
Following Parkway Life REIT’s acquisition of 11 nursing homes in France for EUR111.2 million ($159.9 million), Citi Research analyst Brandon Lee has maintained his “neutral” on the REIT’s valuations with an unchanged target price of $4.
Parkway Life REIT will acquire 11 nursing homes, marking the REIT’s maiden reentry into a third key market after Singapore and Japan. The nursing homes are located across six regions in France, and the portfolio comprises 850 beds across a net lettable area of about 42,600 sq m and enjoys committed occupancy of 100%.
The acquisition cost of EUR111.2 million represents a 3.5% discount to the independent valuation of EUR115.4 million, says Lee, resulting in a “decent” 2% DPU accretion and future growth opportunities in Europe.
The analyst adds that post-acquisition, France will contribute 6.6%/8.1% of Parkway Life REIT’s assets under management (AUM)/revenue, with Singapore still dominating at 62.5%/57.5%, followed by Japan at 30.7%/34.2%.
“We estimate gearing will fall 2.6% percentage points (ppts) to 34.9%, which implies debt headroom of about $210 million before hitting 40%,” he says.
The REIT will fund its acquisition through EFR by proposing a private placement to raise at least $180 million, with an expected issue price of $3.80–$3.88 per share.
The analyst says that this acquisition should bring income stability to Parkway Life REIT, given the portfolio’s 100% committed occupancy, long weighted average lease expiry of 12 years, and indexed rent escalations. He adds that a new long-term strategic partnership has been formed with the vendor, DomusVi Group, which will provide the REIT with potential future consolidation opportunities as DomusVi wishes to go asset-light.
Negatives include the small scale of the acquisition and the softening interest rates in Europe.
Lee thinks that the acquisition could have been funded with debt for greater DPU accretion of 2.4% instead of the currently guided 1.6%. However, gearing would have been higher at 38.4%. — Nicole Lim
PropNex
Price target:
OCBC Investment Research ‘buy’ 91 cents
Proprietary tech to continue attracting agents and raising market share
OCBC Investment Research analyst Donovan Tan has initiated coverage on PropNex with a “buy” call on Oct 21 and a target price of 91 cents.
PropNex is Singapore’s largest real estate agency with over 15,000 salespersons across its 23 regional offices in Singapore, Indonesia, Malaysia, Vietnam, Cambodia and Australia. PropNex has over 12,000 salespersons in Singapore itself, which accounts for about one-third of all the agents in Singapore and 35% more than its closest competitor, notes Tan.
“PropNex salespersons successfully closed around two-thirds of home transactions, highlighting the exceptional productivity of the company’s sales team. We attribute this growth to PropNex’s comprehensive training programs and substantial investments in proprietary technology platforms that can scale alongside the increasing number of salespeople,” he adds.
As such, the analyst expects PropNex’s edge in having its own technology platforms to continue attracting more agents and increasing its market share of property transactions.
Tan also likes PropNex’s highly cash-generative business and asset-light model, which allows the company to deliver “solid” dividend returns to its investors. Based on PropNex’s closing price of 79 cents as of Oct 18, PropNex has a dividend yield of 6.3% based on his FY2024 estimates. With PropNex increasing its dividend payout ratio and having paid 92.9% of its earnings in FY2023, the analyst is expecting the group to pay out 90% of its earnings in FY2024, he writes.
To this end, Tan believes the negative sentiment towards the counter, which is largely due to the overhang of weak project launches, will improve.
“This anticipation is based on the expectation of improvement in the coming months as more projects come online amid a falling interest rate environment, which should rejuvenate the market,” he writes.
Tan expects PropNex’s FY2024 ending Dec 31 EPS to drop by 14.5% to 5.5 cents while its FY2025 EPS is expected to grow by 7.4% to 5.9 cents. — Felicia Tan
