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Analysts positive on Keppel DC REIT with recent Guangdong data centre acquisitions
DBS Group Research analysts Dale Lai and Derek Tan have kept a “buy” rating on Keppel DC REIT with a higher target price of $2.50 from $2.40 previously.
Keppel DC REIT just announced another two acquisitions in Guangdong valued at more than $320 million, following acquisitions in Amsterdam, Guangdong and London in FY2021 ended December 2021. This has resulted in an approximate 2.6% accretion to the REIT’s distribution per unit (DPU) for the FY2023.
The analysts see that the acquisitions are to be completed in two phases with sufficient debt headroom to tap on in FY2022. In addition, they believe that the relatively attractive yield of approximately 8.0% would drive DPU accretion over the next three years.
“Amid record low cap rates for data centres globally, Keppel DC REIT continues to deliver acquisitions that are accretive to distribution per unit (DPU),” write Lai and Tan. “These accretive acquisitions should add to earnings in addition to organic growth within its existing portfolio.”
At the same time, the analysts do anticipate near-term challenges for Keppel DC REIT, though the fundamentals on a whole are still positive. “Higher utility costs and rising interest rates will pose as near-term risks to Keppel DC REIT’s earnings,” they say. “Although accretion from recent acquisitions have been eroded by higher operating costs, we believe the bulk of the impact is already factored into the current share price.”
Going forward, Lai and Tan believe that growing demand for data centres and positive fundamentals in the sector will help Keppel DC REIT return to its organic growth path.
Keppel DC REIT's current portfolio occupancy of more than 98% is the highest since its IPO in 2014. “The continued strong demand for data centre capacity amid the prolonged Covid-19 outbreak and rise of the digital economy would support higher occupancies and revenues across its portfolio in the foreseeable future,” the analysts say.
Citibank Group Research analyst Brandon Lee has kept a “neutral” rating on Keppel DC REIT with an unchanged target price of $2.40.
“We hosted Keppel DC REIT at Citi's Asia-Pacific Property Conference 2022, which appears to be still in acquisitive mode after the recently-announced acquisition of two China data centres,” says Lee. “While data centre cap rates have not expanded like a few other asset classes in other geographies, they also have not compressed, which could facilitate Keppel DC REIT's future acquisitions in markets whereby yield spreads remain positive, likely Japan, Europe and China in our view.”
Lee observes that the current gearing of 36.1% implies $250 million and $630 million of debt headroom before hitting 40% or 45% respectively, hence Keppel DC REIT has sufficient debt headroom to fund the two aforementioned China data centres purely by debt. “However, it could potentially explore equity fund raising (EFR) due to potentially more acquisitions,” he adds.
On a whole, despite share price weakness of technology companies, Keppel DC REIT has not seen and does not expect any impact on their business, with demand driven by acceleration of cloud migration and increased prominence of cloud computing, according to Lee.
As at 11.45am, units in Keppel DC REIT are trading flat at $2.03 with a distribution yield of 5.2% according to DBS Group Research’s estimates.