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Broker's take: DBS downgrades Keppel DC Reit to 'hold'

DBS Group Research has downgraded Keppel DC Reit to "hold", believing that at current prices, "investors have priced in too much growth into valuations".

The research house raised its price target for the data-centre play to S$2.55 from S$2.40. This factors in DBS's increased estimates of the value of the real estate investment trust's (Reit) acquisitions in FY2020.

"Based on its historical track record of delivering acquisitions, we believe Keppel DC Reit can deliver a higher target in 2020 and thus raise our estimates from S$350 million to around S$600 million," analyst Derek Tan said in a Tuesday report.

As at 11.38am on Tuesday, Keppel DC Reit units were trading S$0.02 or 0.8 per cent lower at S$2.48. Based on Monday's closing price of S$2.50, the counter was trading at a forward yield of 3.3 per cent.

"We believe that Keppel DC Reit can deliver accretive acquisitions given the positive spread between target cap rates and its cost of equity," Mr Tan wrote.

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However, it is now tougher for the Reit to find value in the market, given that the "robust" competition for data-centre assets has resulted in a compression in returns, Mr Tan noted.

The lack of a stabilised pipeline from its sponsor Keppel Corp also means the Reit is likely to make third-party acquisitions in the near term, DBS noted.

"As such, we believe that Keppel DC Reit will have to deliver acquisitions in the range of S$800-1,000m in order to surprise and re-rate further," Mr Tan said.

However, this might pose a challenge for the Reit. "While the ability to deliver deals is there, we believe the lack of available large-scale data-centre transactions, especially given the lack of a pipeline from the sponsor, may mean that deal sizes are unlikely to reach those levels," he added.

Risks to DBS's view include competition from larger third-party data centre players. Mr Tan said Keppel DC Reit may face higher barriers to entry and stiffer competition from international operators or funds that are also looking to grow their footprint and attract tenants.

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