PhillipCapital analyst Darren Chan has upgraded his call on Keppel DC REIT (KDCREIT) from “neutral” to “buy”, following the REIT’s recent share price performance after its 3QFY2023 results ended Sept 30.
Chan’s target price remains unchanged at $2.26.
Despite the REIT reporting a lower distribution per unit (DPU) of 2.492 cents, this is in line with the analyst’s expectations, forming 25.1% of their FY2023 forecasts.
Chan says that the REIT’s 3QFY2023 revenue/net property income (NPI) growth of 0.5%/0.8% y-o-y was driven by contributions from acquisitions and positive income reversions and escalations. However, this was “more than offset” by higher finance costs (+56.9% y-o-y) and less favourable forex hedges.
Chan highlights two positives from the performance of the REIT for this quarter. Firstly, Keppel DC REIT maintained a high portfolio occupancy of 98.3% with a portfolio weighted average lease expiry (WALE) of 7.8 years.
He notes that 27.7% of leases by rental income will expire in 2024, with only 1% expiring for the rest of 2023. The leases signed in 3QFY2023 were in Singapore, Australia, Ireland and the Netherlands, and were at positive rental reversions.
“Additionally, some of the leases signed were restructured into power pass-through leases, which should improve NPI margins,” Chan says.
In addition, the REIT demonstrated prudent capital management, with 72% of debt on fixed rate, according to the analyst.
He notes that the average cost of debt increased 0.2 percentage points (ppts) q-o-q to 3.5% in 3QFY2023, and interest coverage ratio (ICR) remains healthy at 5.4x. The REIT has 4.2% of debt up for refinancing in 2024 and the majority of debt expiring from 2026 and beyond. However, Chan notes that gearing increased 90 basis points (bps) q-o-q to 37.2%.
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“A 100 bps increase in interest rates would lower DPU by about 2.4%. Forecast foreign sourced income is also substantially hedged till June 2024,” he adds.
While the analyst maintains that there are no negatives for the REIT, he notes that there is a final payment of about $142 million upon the completion of Guangdong Data Centre 3, originally scheduled for 3QFY2023, but has been delayed due to Covid-related supply chain disruptions.
“According to our estimates, gearing would still remain below 40% even if this was fully funded by debt. However, equity fund-raising could be an option, especially if KDCREIT was to combine this final payment with an acquisition,” says Chan. “The most likely contender would be its sponsor’s Keppel DC Singapore 7 (KDC SGP 7) asset situated at Genting Lane, which is currently being fitted-out by the tenant after its completion in 2QFY2023.”
With that, the analyst concludes that KDCREIT’s growth catalysts would include more accretive acquisitions and lower-than-expected interest costs, while organic growth will stem from renewals in FY2024, barring contributions from potential acquisitions.
“The current share price implies FY2023/FY2024 DPU yields of 5.2%/5.4%,” Chan says. “We upgrade from neutral to buy with an unchanged dividend discount model-derived target price of $2.26.”
As at 1.03pm, units in Keppel DC REIT are 1 cent down or 0.56% lower at $1.77.
