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'Buy' Singtel as Asean's data centre sector enters 'hyper-growth': RHB

Jovi Ho
Updated ·4-min read

Also of potential interest are two pure-play data centre S-REITs: Keppel DC REIT and Digital Core REIT.

Asean's data centre market is on the cusp of “hyper-growth”, particularly in Singapore, Malaysia and Indonesia, say RHB Bank’s analysts Jeffrey Tan and Wan Muhammad Ammar Affan.

According to Frost and Sullivan, the three markets are expected to account for a combined 74% of the US$5.7 billion ($7.59 billion) Asean data centre market by 2025. “The positive outlook resonates well with our preference for fixed line plays,” say RHB’s analysts.

Singapore’s calibrated data centre growth is squeezing inventory resulting in overflow to neighbouring hubs. “While Singapore continues to be the epicentre of data centre growth in Southeast Asia, the more stringent conditions laid out for new builds have compelled investors to consider alternative sites or hubs in the region,” write RHB’s analysts in an April 13 sector update.

The regionalisation of the data centre business is a key focus area for Singapore’s Singtel Z74. As part of its strategic business reset announced in May 2021, Singtel aims to be a leader in data centre services regionally with the best interconnectivity in Southeast Asia by 2026.

The group is already the market leader in Singapore, having started data centre operations more than two decades ago. Singtel currently owns and operates seven data centres nationwide with a rated capacity of more than 70 megawatts (MW).

Singtel’s expansion over the next three to five years will see its data centre footprint grow to more than 170MW regionally from its Indonesia and Thailand joint ventures.

In February 2022, Singtel, together with its 23.3%-owned mobile associate Advanced Info Services, entered into a joint development agreement with power producer Gulf Energy for the construction of a data centre at Bang Phli, near Bangkok, Thailand.

The data centre, which is slated for commissioning in 2025 with an initial 20MW capacity, will be operated by GSA Data Centre (GSA). GULF, Singtel and AIS hold equity stakes of 40%, 35%, and 25% in GSA.

In December 2022, Singtel entered into a strategic partnership with state-owned incumbent operator Telkom Indonesia, the parent of Singtel’s 25%-owned mobile associate Telekomunikasi Selular, and Medata centreo Power Indonesia to develop a data centre on Batam Island.

This facility will mark the group’s first foray into Indonesia’s data centre market and is its second regional data centre expansion after Thailand. This data centre will have a rated capacity of 51MW when fully completed, with a 20MW capacity in its initial phase from 2025.

At its 2022 Investor Day, Singtel said it does not rule out expanding its data centre presence in Malaysia and Vietnam via partnerships or asset acquisitions. “The expansion would be largely aimed at meeting pent-up demand and to address the more stringent conditions laid out by the Infocomm Media Development Authority (IMDA) and Economic Development Board (EDB) for new data centres in Singapore following the lifting of the data centre moratorium.

RHB recommends investors “buy” Singtel, with a target price of $3.30. “For 1HFY2023 ended March, the group’s data centre business generated $132 million and $85 million in revenue and ebitda, or less than 5% of overall group revenue and ebitda.”

Apart from Singtel, the Singapore REITs (S-REITs) space boasts two pure-play data centre REITs: Keppel DC REIT (KDCREIT) AJBU and Digital Core REIT DCRU.

KDCREIT is the best proxy for Asean data centre exposure to Singapore, says RHB, with 55% of total assets under management (AUM) of $3.7 billion. Its Malaysia assets represent just 1% of AUM.

Meanwhile, Digital Core REIT’s data centre portfolio is fully located in North America.

Other industrial S-REITs with notable exposure to the data centre market include Mapletree Industrial Trust (MINT) ME8U, with data centres making up 54% of total AUM, mainly in North America; and CapitaLand Ascendas REIT (CLAR) A17U, with data centres representing 8% of its $16.4 billion in assets.

Last week, DBS Group Research analyst Dale Lai recommended investors “buy” data centre S-REITs as three names come under pressure from a distressed tenant. Lai thinks Digital Core REIT could deliver the greatest upside, with a target price of 90 cents against a price of 45.5 cents on April 6.

Meanwhile, KDCREIT is a “preferred long-term pick” for DBS’s Lai. “KDCREIT’s well-diversified portfolio and the full-year contribution of Guangdong DC 2 and 3 [the REIT’s first acquisitions in China] will drive a 4% growth in distribution per unit (DPU) in FY2024, and offers the most resilience.”

As at 12.23pm, shares in Singtel are trading flat at $2.50.

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