Brokers' take: DBS starts Digital Core Reit at 'buy' with US$1.40 target

DBS Group Research has initiated coverage on Digital Core Reit (DC Reit) DCRU with a "buy" call and a target price of US$1.40, as it sees the pure-play data centre real estate investment trust (Reit) benefiting from the rise of the digital economy and emerging trends.

That, along with stable earnings from fully-occupied data centres, ample headroom for portfolio growth and a "strong commitment" from its sponsor Digital Realty, gives DC Reit the space to become one of the largest Singapore-listed Reits (S-Reits), the team wrote in a report on Friday (Jan 14).

The US$1.40 target price put forward by DBS offers a 19 per cent upside to the Reit's last closing price of US$1.18 on Thursday.

It assumes US$250 million from debt-funded acquisitions in FY2022, as well as US$500 million in acquisitions funded by both debt and equity the following financial year. Both are expected to drive a 3-year distribution per unit compound annual growth rate of about 7 per cent over FY2021 to FY2024, and 10 to 11 per cent above initial public offering forecasts.

This is given the Reit's healthy cash flow, in the research team's view, due to the full occupancy of its 10 data centres with few lease expiries, which allows the trust to recover operating costs from its tenants.

DC Reit is also primed for the increasing demand for data centres from the rise of the digital economy, the team noted. Cloud computing, enterprise modernisation, streaming and e-payment were all cited as key drivers for the digital economy, with each requiring digital infrastructure.

Such data centres are used by technology giants such as Amazon, Facebook and Google to support hundreds of millions of users globally.

With its data centres positioned in the US and Canadian markets, where "demand remains strong", DC Reit is set to become a main beneficiary of the new trends accelerated by the Covid-19 pandemic, DBS wrote.

Although all of its 10 data centres are located in the US and Canada, the research house believes the Reit has ample opportunity to invest globally due to its low initial gearing which would provide it with flexibility to make acquisitions "immediately to drive earnings growth".

The Reit has also been granted a global right of first refusal by its sponsor Digital Realty, one of the largest data centre owners in the world, to 281 of its existing data centres located in America, Europe and Asia.

"We believe that the identified pipeline fits DCR's (Digital Core Reit's) principal investment strategy of investing, directly or indirectly, in a diversified portfolio of stabilised income producing real estate assets," commented analysts.

As such, they believe that DC Reit can count on its sponsor pipeline to "lead it into its next phase of growth" and compete with its other larger-cap peers.

DBS's "buy" call is echoed by UOB Kay Hian (UOBKH), which initiated coverage on DC Reit on Dec 7, 2021. UOBKH had noted that the Reit traded at 1.2 times its net asset value, calling it a "huge discount" compared with other data centre Reits.

DC Reit units closed flat at US$1.18 on Friday.

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