Keppel DC REIT - Powering Up In China
- Just as we had turned cautions and lowered our acquisition assumptions for Keppel DC REIT (SGX:AJBU), it has surprised on the upside by delivering two acquisitions in Guangdong, China. The acquisition of the two new data centres will be carried out in two stages.
- Guangdong DC 2 (6 Bluesea Intelligence Valley Data Centre)
- Guangdong DC 3 (7 Bluesea Intelligence Valley Data Centre)
- Based on an initial gross rent of RMB 63.0m for each property, both assets were acquired at a relatively attractive gross yield of ~8.3%. After accounting for VAT, the initial gross yield is at an estimated ~8.0%.
- Following the acquisition of Guangdong DC 2 and Guangdong DC 3, Keppel DC REIT will now own three of the six data centres to be developed on the campus. All three data centres are developed, and master leased to Guangdong Bluesea Data Development Co., Ltd., a subsidiary of Neo Telemedia Limited (listed on the Hong Kong Stock Exchange; 8167 HK).
- We understand that Keppel DC REIT intends to fund the RMB 860.0m (RMB 760.0m and RMB 100.0m) in FY22 entirely by debt.
- Amid record-low yields for data centres globally, we are pleasantly surprised by Keppel DC REIT’s ability to embark on this acquisition valued at ~S$320m. The relatively attractive yield of ~8.0% would drive DPU accretion over the next 3 years.
- Although the supply of data centres throughout China is expected to grow in the near-to-medium term, the 15-year lease for both properties will ensure income stability. Moreover, we understand that demand for data centres in the Guangdong province continues to remain very strong. The triple-net basis for both the leases at Guangdong DC 2 and 3 also helps to mitigate any potential increase in operating costs, and the annual rental escalations will provide for some organic income growth.
- Moreover, the technology and internet sectors in China could benefit from the potential easing of regulations after more than two years of scrutiny by the authorities. The return of rapid growth of the technology and internet sectors should drive stronger demand for data centres in China.
- Although we have factored in a potential equity fund raising of ~ S$90m by 3Q23 (to fund the remaining payment for Guangdong DC3 ), we still expect the acquisitions to be ~2.6% accretive to DPU. Furthermore, if Keppel DC REIT’s portfolio undergoes a revaluation uplift at the end of FY22, the amount of equity fund raising could potentially be lower.
- Having exceeded our growth expectations, our projections do not assume any further acquisitions. Any further acquisitions for the rest of FY22 and FY23 will lead to upside to our estimates. In addition to the ROFR for the three remaining data centres to be developed at the Bluesea Intelligence Valley Mega Data Centre Campus, Keppel DC REIT can tap on its extensive network for other third-party acquisitions.
- Based on our revised DPU estimates, Keppel DC REIT is currently generating a very attractive forward yield of more than 5.2%. As such, we have raised our target price to S$2.50 and maintain our BUY recommendation on Keppel DC REIT.
Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @ https://www.dbs.com/insightsdirect/.
Dale LAI DBS Group Research | Derek TAN DBS Research | https://www.dbs.com/insightsdirect/ 2022-06-21 2022-06-21
Previous report by DBS Research:
2022-06-03 Keppel DC REIT - Yields That Are Too Hard To Ignore
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