Brokers' take: DBS, CGS-CIMB upgrade Keppel DC Reit to 'buy' on China expansion

KEPPEL DC Reit's AJBU maiden acquisition in China will provide a significant boost to distributions at the data centre real estate investment trust (Reit), analysts said as they upgraded their calls on Tuesday. They also believe the Reit could begin adding more aggressively to its portfolio.

The research team at DBS upped its call from "hold" to "buy", upping its target price from S$2.80 to S$3. This is a 15.8 per cent upside from its closing price of S$2.59 on Tuesday.

DBS said in its report that the announcement of the Guangdong data centre acquisition, for 639 million yuan (S$132 million), has "reignited optimism on Keppel DC Reit's growth trajectory".

"At the current share price and its relatively low weighted average cost of capital, acquisitions should be highly accretive," they said.

DBS projects Keppel DC Reit's distribution per unit (DPU) to grow by 8 per cent per year, on a compounded basis, from now to FY2023.

Growth will be driven by asset enhancement initiatives points as well as acquisitions, with more acquisitions expected by the end of FY2022. DBS has assumed acquisitions of S$300 million in H2 2022.

Keppel DC Reit on Monday said DPU for H1 2021 increased 12.5 per cent to 4.924 Singapore cents.

CGS-CIMB, meanwhile, has upgraded its call on Keppel DC Reit to "add" from "hold". Its target price, however, was revised downwards: to S$2.84 from S$2.86. That represents potential upside of 9.7 per cent.

Analysts at CGS-CIMB said in a report that Keppel DC Reit had missed its projections, with DPU for H1 coming in at just 47.1 per cent of what CGS-CIMB is forecasting for the full year.

But the research team projects a stronger second half, and also sees Keppel DC Reit possibly picking up the pace of its acquisition.

The property it is buying in China is the first of six data centre buildings to be completed in the Bluesea Intelligence Valley Mega Data Centre Campus, and Keppel DC Reit will have right of first refusal to the remaining five too.

A faster acquisition pace would be a re-rating catalyst, CGS-CIMB said.

On the environmental, social and governance front, CGS-CIMB noted that Keppel DC Reit has a relatively good performance across all pillars. But the brokerage flagged the need to monitor the energy consumption of Keppel DC Reit's data centres. It also noted the Reit's slower-than-expected implementation of responsible environment practices across its holdings as a possible drag on its stock.

READ MORE: Keppel DC Reit to acquire China data centre for 635.9m yuan, posts 12.5% H1 DPU growth