Keppel DC REIT started at Buy by Daiwa on acquisition pipeline

Singapore two-dollar bills

Daiwa started coverage of Keppel DC REIT at Buy with a S$3.00 target price, saying the potential acquisition pipeline of 12 data center assets will be a major unit-price catalyst.

The brokerage said its forecasts price in the near-term acquisition of five Guangdong right-of-first-refusal data centers, with an assumed aggregate value of around S$750 million and a net property income yield of 8.5 percent. That will boost Keppel DC REIT’s annual distribution per unit (DPU) by 7-13 percent over 2023-24, while boosting the REIT’s China exposure to around 20 percent of revenue by 2024, Daiwa estimated in a note last week.

“KDC REIT should gain an early-mover advantage in [China’s] Greater Bay Area (slated development into data hub) with minimal execution risk, in our opinion,” Daiwa said.

Daiwa forecast DPU compound annual growth rate of 12.1 percent for 2020-23 after factoring in acquisitions, inherent growth and major exposure to Singapore.

“We expect considerable use of green energy in pipeline assets, which should lower environmental risks and required capital expenditure in the future,” Daiwa said.

Keppel DC REIT’s unit price is trading at 21-23 times enterprise value-to-earnings before interest, taxes, depreciation and amortisation (EV/ebitda) multiples, compared with 22-27 times for U.S. data center REITs for 2021-23, Daiwa said. In addition, Keppel DC REIT’s 12-month forward dividend yield is 4.5 percent, compared with 1-3 percent for its U.S. peers and 5.4 percent for the Singapore REIT (S-REIT) sector, the note said.

“KDC REIT had traded at a premium to the U.S. REITs since 2020 but has been derated recently, due possibly to a lack of deal-flow
announcements,” the note said.

Units of Keppel DC REIT rose 1.19 percent to end Friday’s trade at S$2.56.