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Broker's take: KGI downgrades Keppel DC Reit to 'neutral'

1-net north data centre
While rental reversions are likely to be positive for individual leases, KGI expects the average rent psf to fall in the future, diluted by 1-Net North DC (above) in Singapore and the Kelsterbach data centre in Germany.

KGI Securities has lowered its call on Keppel DC Reit to “neutral”, but increased its target price on the counter.

“While the data centre industry remains an attractive investment thematic, we think the sub 4 per cent dividend yield of Keppel DC Reit signals a fair valuation for its current share price,” wrote KGI research analyst Kenny Tan on Tuesday night.

The data-centre real estate investment trust (Reit) saw its dividend yield coming in at 3.66 per cent for FY19 ended Dec 31. Forecast dividend yield is about 3.63 per cent for FY20 and 4.17 per cent for FY21, according to KGI’s note on Tuesday night.

“We think there could be better opportunities in the market, as Keppel DC Reit is quite fully valued, barring a highly accretive acquisition,” Mr Tan said.

Meanwhile, KGI upped the target price to S$2.19, from S$2.11 previously. This factors in contributions from the proposed acquisition of the Kelsterbach asset in Germany, expected to complete in the first half of this year.

Keppel DC Reit units closed at S$2.38 on Tuesday, down S$0.07 or 2.9 per cent, before the report was released.

The brokerage also lowered its FY2020 forecast distribution per unit (DPU) forecast while raising its FY2021 DPU estimates for the Reit.

Mr Tan noted that the Reit’s pre-offering FY19 DPU of 7.71 Singapore cents was in line with KGI’s full-year 2019 forecast of 7.70 cents.

Gross revenue for the fourth quarter last year grew 10.3 per cent from a year ago, due to the twin acquisitions of SGP 4 and 1-Net North Data Centre in Singapore.

However, revenue for FY19 of S$194.8 million missed the brokerage’s expectations by about 2.5 per cent.

“While rental reversions are likely to be positive for individual leases, we expect average rent psf (per square foot) to fall in the future, diluted by 1-Net North DC and the Kelsterbach data centre,” Mr Tan said.

Keppel DC Reit’s manager has advised that the main sponsor, Keppel T&T, is unlikely to have any projects ready this year. Mr Tan wrote: “We think Keppel DC Johor 1, which will be leased out to a single cloud giant tenant, can be a reasonable divestment in H2 2020 upon construction completion.”

Despite lingering concerns about supply chain disruptions and stock market weakness from coronavirus fears, KGI remains confident of data centre trends. Supply chains are still intact, and this has provided support to the Reit’s unit price despite heavy market selloffs in recent weeks, Mr Tan said.

“Data centre management will continue to consolidate towards hyperscalers and their private/public cloud infrastructures,” he added.

“While 2019 was a year of slower growth of enterprise-level data centres, 2020 is set to be the year for rebound.”

KGI's downgrade comes two weeks after DBS Group Research likewise lowered Keppel DC Reit to “hold”. DBS said it believed that at prevailing prices investors had “priced in too much growth into valuations”.