Analysts remain positive on Keppel DC REIT (KDC REIT) following the announcement of its 1HFY2024 results ended June 30. Both Citi Research and DBS Group Research have kept their “buy” calls, with target prices of $1.91 and $2.20 respectively.
Citi’s analyst Brandon Lee says that the REIT’s 1HFY2024 distribution per unit (DPU) of 4.55 cents, which fell by 9.9% y-o-y but rose 5% h-o-h, comprised 50% of his total DPU estimate for the FY2024. The REIT’s 1HFY2024 DPU comprised 51% of the consensus’ full-year estimate.
He notes positives from KDC REIT’s results, including the improvement of the quantification of rental reversions of more than 40%, achieved through a major contract renewal in Singapore, and the split of lease expiries by contract type in terms of net lettable area (NLA) and rental income, with colocation contributing to bulk of near-term expiries.
KDC REIT is also working on acquisitions globally, not just in a specific country, although any acquisitions will have to be accretive. It will also not look to acquire any 5G network assets, Lee notes.
The REIT cannot give clarity on cash-flow status of its Keppel Data Centre Campus (KDCC) in Singapore, but says that phase two of the asset has achieved operational readiness, the analyst adds.
Meanwhile, its Almere 2 data centre in Netherlands and Keppel DC Johor 1 are completed and fully tenanted, Lee says. And, most of Keppel DC REIT’s assets can handle inference AI and might look to do some minor refresh or updates and redevelopments in its portfolio to cater to those requirements.
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“While KDC REIT acknowledges the rising demand for data centres in Johor, it mentioned that both Singapore and Johor have its own characteristics from an end-user perspective, with Singapore offering inter-connectivity and end-users likely favouring Singapore for activities which are more critical and latency-sensitive,” says Lee.
However, some negatives noted by the analysts include its data centres in China. KDC REIT says that it's working very closely with Bluesea, the master-lessee of its two data centres in Guangdong, on the recovery plan. It has been working on building up the leasing pipeline to give them a stronger base to work on.
While the team has now built up a potential pipeline of 12,000+ racks (which seem more than what the assets have of about 8,000 server cabinets and technically means can achieve full stabilisation), access to chips remains an issue, the analyst notes.
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“From a rental collection standpoint, 2QFY2024 is similar to 1QFY2024 (which is about RMB0.65 million; net cash-flow) but underlying utilisation has crept up q-o-q. Portfolio occupancy fell 0.8 percentage points q-o-q to 97.5%, chiefly due to KDC SGP 1 in Singapore (-10.5% points due to DXC space taken back) and Amsterdam DC (-4.6% points to 95.1% due to 1 tenant exiting its office space),” says Lee.
Although Lee says that the REIT’s 1HFY2024 results painted the strength of Singapore's colocation data centre market, he notes that key downsides include short land tenure on its Singapore assets, relatively high degree of customer concentration, and higher-than-expected capex requirements.
Upside risks include the introduction of highly accretive acquisitions into the portfolio; higher-than-anticipated asset revaluations; and better-than-projected rental reversions.
Lee notes that KDC REIT’s improved disclosures this quarter are a plus, and that the REIT remains one of his top picks among the Singapore REITs (S-REITs).
Likewise, DBS analysts are positive on the REIT. However, they note that portfolio occupancy decreased by 80 basis points q-o-q to 97.5%, primarily due to lower occupancy at its Singapore 1 DC.
They believe that the slight dip in occupancy rates in Singapore is likely transitional and should improve in the near term given limited supply. And, the DXC settlement will help provide some cushion to earnings this year, especially with the continued rental arrears at Guangdong DC, the analysts add.
“Despite this, KDC REIT maintained a healthy gearing of 35.8%, although it is expected to increase to around 39.2% following the completion of the Tokyo Data Centre in 3Q2024,” they note.
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But, the analysts believe that such levels remain comfortable for KDC REIT given that valuations of DCs remain relatively stable and could even see some valuation increase by the end of the year.
“We remain watchful on the developments at the Guangdong DCs, which continue to cast an overhang on KDC REIT. Despite this, KDC REIT’s underlying operations remain robust with healthy organic growth in revenues, and we will be maintaining our “buy” recommendation with a target price of $2.20,” they end.
As at 3.20pm, units in Keppel DC REIT are trading 1 cent lower or 0.524% down at $1.90.
