Brokers’ take: DBS still sees upside for Keppel DC Reit despite rising costs

Yong Hui Ting
Published Thu, Oct 27, 2022 · 11:26 AM

EVEN as accretion from recent acquisitions for pure data centre play Keppel DC Real Estate Investment Trust : AJBU 0% (Reit) have been eroded by higher operating costs in recent times, the growing demand for data centres is set to push the Reit back onto its path for organic growth.

DBS group research on Thursday (Oct 27) lowered its target price from S$2.50 to S$2.20, as it maintained a “buy” call on the Reit. This comes as analysts believe that the impact of higher operating costs on accretive acquisitions have already been priced in and given the sector’s positive fundamentals, further growth can be expected for the Reit.

The research house noted that while financing costs for Keppel DC Reit inched up 2.3 per cent, this was largely mitigated by loans hedged to fixed rates. The Reit’s prudent hedging of foreign currencies also helped to mitigate impact from the recent fluctuations in foreign exchange.

With a current portfolio occupancy of 98 per cent, this represents the highest occupancy since the Reit’s listing 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,” said the analysts.

Analysts were optimistic on an upside for the Reit even as they assume that close to S$92 million would be raised in FY2023 to fund the remaining payment for Guangdong DC 3. They believe the accretive acquisition would add to the Reit’s earnings and propel further growth in distribution per unit (DPU) in future.

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Key risks however, include rising competition from larger third party data centre players which are also looking grow their footprint and attract tenants. This will in turn raise barriers to entry for Keppel DC Reit.

“With interest rates looking to continue rising and foreign currencies expected to remain depressed against the Singapore dollar, we believe there could be some downside risks in the coming years,” wrote the analysts in their report.

This led analysts to lower their DPU estimates by 9 per cent over the next two years as they lowered their target price to S$2.20, adding however that the new target does not reflect any further acquisition assumptions.

Still, with a forward yield of more than 5.7 per cent, DBS thinks the Reit is trading at a very attractive level and thus kept to its “buy” call on the counter.

Units of Keppel DC Reit were trading 1.7 per cent higher, or S$0.03, at S$1.77 as at 10.55 am.

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