Can Keppel DC REIT deliver the acquisitions needed to keep premium valuations?
SINGAPORE (July 22): Keppel DC REIT, the first pure-play data centre REIT listed in Asia, has seen its shares climb some 28% so far this year on the back of the global boom in data centres.
The REIT is now trading near an all-time high, nearly double of its IPO price of 93 cents per unit in December 2014.
In the latest quarter, Keppel DC REIT posted a 6% increase in distribution per unit (DPU) to 1.93 cents, from 1.82 cents in 2Q18.
See: Keppel DC REIT 2Q DPU rises 6% to 1.93 cents on acquisitions
Gross revenue for 2Q19 rose 13.2% to $47.5 million, as net property income grew 13.6% to $43.3 million.
Distributable income rose 18.1% to $27.2 million for 2Q19, largely led by the acquisitions of maincubes Data Centre in Offenbach am Main, Germany, and Keppel DC Singapore 5 in 2018.
It currently has a portfolio comprising 15 data centres across eight countries, with an aggregate lettable area of about 1.1 million sf.
However, some analysts have hit pause on the stock, despite continued strong demand in the data centre industry.
CGS-CIMB Research has downgraded its call on Keppel DC REIT to “hold” from “add” previously with an unchanged target price of $1.67.
“While we are still positive on the data centre industry due to its future-ready characteristics, we think investors could look for a lower entry point,” says analyst Lock Mun Yee in a July 16 report.
Lock notes a delay in the completion of Intellicentre 3 East Data Centre (IC3 East DC), which was expected to be completed between 2019 and 2020.
Keppel DC REIT in August last year announced that it will be expanding one of its existing data centre, Intellicentre 2 Data Centre (IC2 DC), which will then be renamed IC3 East DC.
Similarly, KGI Securities has downgraded its recommendation on Keppel DC REIT to “neutral” as near term catalysts seems to already be priced in. The research house has also increased its target price on the stock to $1.71 from $1.62 previously.
In a July 17 report, analyst Geraldine Wong says a more conservative price for accumulation is preferred. The analyst also awaits a catalyst for near term re-rating.
Keppel DC REIT’s manager has said that it could potentially acquire Keppel DC Singapore 4 (KDC SGP 4) this year, but the data centre has yet to stabilise despite stable demand in Singapore.
“We suspect that a third party acquisition for a foreign data centre could possibly be nearer within the acquisition timeline, given the current debt headroom and an asking cap rate of between 6.0% - 7.0%,” says Wong.
On the other hand, DBS Group Research is much more bullish on the stock.
The research house is keeping its “buy” call on Keppel DC REIT, and raising its target price from $1.60 to $1.90 – the highest target price on the street.
“It is one of the few REITs in Singapore capable of making accretive acquisitions, supported by a conducive cost of capital. We believe that the REIT will deliver on market expectations of acquisitions which will keep valuations at a premium,” says lead analyst Derek Tan in a July 17 report.
As at 3.33pm, units in Keppel DC REIT are trading 1 cent down at $1.74, giving it a FY19 price-to-book ratio of 1.6 times with a dividend yield of 4.6%.
