SINGAPORE (Dec 18): DBS Group Research is maintaining its “buy” call on Keppel DC REIT (KDCREIT) with a target price of $2.23, translating into a potential 13% upside for the stock.
DBS analyst Derek Tan cites the REIT’s recent string of accretive acquisitions, namely KDC SGP 4 and DC 1 in Singapore, and Kelsterbach DC, a data centre in Germany.
Although the REIT’s second data centre in Germany had set it back by some $125.3 million, Tan opines that the REIT is in a comfortable position to fund the acquisition.
“Post the equity fund raising in mid-September 2019, KDCREIT will capitalise on its low gearing to fully fund this acquisition by debt,” says Tan in a Wednesday report. He adds that the acquisition is slated to have an initial yield of 6.5%.
The brokerage notes that KDCREIT has made three DPU accretive acquisitions in as many months, and will have positive impacts on several of its financial metrics.
For a start, the acquisitions will see KDCREIT’s assets under management (AUMs) increase to $2.7 billion, while portfolio occupancy will inch up to 96% from the previous 94.5%. And although the REIT’s gearing is expected to reach 35%-36% post acquisitions, Tan notes that it still has debt headroom in excess of $400 million.
“Having already acquired close to $770 million of assets in recent months, KDC REIT will be looking forward to a record DPU in FY20,” says Tan.
And as Tan sees it, KDCREIT is likely to take advantage of its low costs of equity and debt to make more accretive acquisitions in the upcoming year. In his view, KDCREIT is in a “virtuous cycle” where acquisitions, if executed upon, are most likely to be accretive.
“The acquisition of Kelsterbach DC attests to KDCREIT’s ability to acquire third-party quality assets yet again,” says Tan. “Given that earnings of its existing portfolio are stable, DPU growth is likely to be driven by further acquisitions,” he observes.
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To be sure, the brokerage considers KDCREIT one of the “strongest performers” amongst S-REITs despite its relatively short trading history. “While its share price has diverged from the broader market performance, this can be largely explained by its acquisition announcements, coupled with its exposure to a unique asset class – data centres – which we believe has a structural growth story,” says Tan.
Looking ahead, Tan anticipates strong operational results for the REIT, on the back of its recent acquisitions and its inclusion into the EPRA Nareit Developed Asia Index. “We believe the higher visibility and trading liquidity will lower the cost of capital for the REIT,” says Tan.
In addition, Tan notes that interest rate movements appear to have an insignificant impact on the REIT’s share price, which indicates that such risks are likely to be mitigated by the proactive management of the REIT’s debt profile.
On the flipside, Tan identifies some risks that could hamper KDCREIT’s success. For instance, the shorter lifespan of datacentres’ infrastructure indicates that the REIT may have to rely on borrowings to fund its maintenance capex at certain properties, which could in turn impact gearing adversely.
In addition, competition from larger third-party data centre players could mean higher barriers to entry and stiffer competition for markets in which KDCREIT operates in.
As at 3.31pm, units in Keppel DC REIT are trading three cents higher, or 1.5% up, at $2.00. This translates into a price-to-earnings (P/E) ratio of 20.6 times and a distribution yield of 4.6% for FY20F according to DBS valuations.
