Keppel DC Reit: Is there more headroom for growth?

By ShareInvestor – 28 October

  • First pure-play data centre REIT listed in Asia
  • Bright growth prospects with Big Data Boom
  • 5-year steady growth in Revenue & Net Income available for distributions
  • Lowest Distribution Yield among Industrial REIT peers
  • AUM and DPU set to jump with 2 recent purchases

Data has become the new gold with the unprecedented growth in cloud computing driven by tech titans like Amazon, Facebook, Google etc.

As a result, it has fuelled the boom in the data centre sector, especially for Keppel DC REIT - the first pure-play data centre REIT listed in Asia. Its share price has jumped more than 50% to S$2.00 from S$1.32 a year ago.

In fact, Keppel DC REIT appeared in our “Dividend Portfolio” screener results when we run it based on the pre-set metrics available in ShareInvestor WebPro:

With that in mind, we delved deeper into the company to see if there is more headroom for growth.

Company Background

Sourced from SBR.com.sg

Listed on 12 December 2014, Keppel DC REIT is the first pure-play data centre REIT listed in Asia on the Singapore Exchange (SGX-ST).

Keppel DC REIT's investment strategy is to principally invest, directly or indirectly, in a diversified portfolio of income-producing real estate assets which are used primarily for data centre purposes, as well as real estate related assets, with an initial focus on Asia Pacific and Europe.

Its current portfolio comprises 15 high-quality data centres strategically located in key data centre hubs. With an aggregate lettable area of approximately 1,112,983 sq ft, the portfolio spans ten cities in eight countries in Asia Pacific and Europe.

The REIT is managed by Keppel DC REIT Management Pte. Ltd. (the Manager). Keppel Capital has a 50% interest in the Manager, with the remaining interest held by Keppel Telecommunications & Transportation (Keppel T&T).

Keppel Capital is a premier asset manager in Asia with assets under management of approximately $29 billion in real estate, infrastructure and data centre properties in key global markets.

For more information, please refer to its investor relations website here.

Keppel DC REIT Dividend Distribution Chart

As of 17Oct2019 | Sourced from ShareInvestor WebPro

Given its REIT’s profile, we dived into the distributions table of Keppel DC REIT head-on first. With its IPO listing on 12 Dec 2014, we are only able to garner around 5 years of distributions in the table above.

That said, although the quarterly distributions do not increase on a linear basis year-on-year, we can see a constant increase in total distributions year after year.

For example, the 1.74 cents DPU of 3QFY2017 is a drop from 3QFY2016 DPU of 1.90 cents, but there is a catch up where 4QFY2017 DPU soars to 1.75 cents versus 0.90 cents the previous year.

If one has stay vested since Keppel DC REIT’s IPO price of S$0.90, he would have achieved 8.13% yields based on FY2018 DPU of 7.32 cents.

Financial Analysis Overview

Apart from the dividend analysis part, we also turned our attention to Keppel DC REIT’s financials.

For a quick overview, we turn to our proprietary Smiley Financial Analysis function in ShareInvestor’s WebPro as seen below.

As of 17Oct2019 | Sourced from ShareInvestor WebPro

A quick glance at the green smileys, we see increased revenue and profits for the consecutive past 2 years. The company is also able to secure a good gross and net profit margins for the past 3 years (which should be the case for a REIT).

More importantly, the distribution payout is also increasing over the past 2 years which we have covered previously as well.

Investors do not need to worry about the red smiley (watch out sign) because Keppel DC REIT has in fact increased its net income available for distribution constantly which we will show below:

As of 17Oct2019 | Sourced from ShareInvestor WebPro

Zooming into the profit and loss figures, investors can clearly see that its total revenue has been growing steadily from S$99 mil to S$189 mil trailing 12M Sep 2019.

Same goes for the net income available for distribution, which has increased in tandem with the revenue growth.

Industrial REITs Peer Comparison

Next up, we did a quick comparison with other Industrial REITs listed in Singapore.

As of 18Oct2019 | Figures from ShareInvestor’s WebPro

From a quick glance at the table above, Keppel DC REIT is trading at roughly 1.55x P/NAV ratio. It is considerably higher as compared to Frasers Logistics&Industrial Trust, Sabana and SoilbuildBiz Reits but lower compared MapleTree Industrial Trust.

However, its distribution yield is currently the lowest among them all at around 3.05% versus 7.07% for Sabana REIT and even 4.35% for the popular MapleTree Industrial Trust.

On the flip side, it has a good debt to assets ratio of 30% and one of the highest return on assets at 6.24%.

Keppel DC REIT Growth Prospects

Last but not least, Keppel DC REIT has been actively trying to bolster its assets through acquisitions. Case in point, the REIT did a recent private placement around September 2019 which raised S$478.2 million.

Around 91.7% of the proceeds will be utilized for the acquisition of a 99% interest of a data centre, Keppel DC Singapore 4, as well as a 100 per cent stake in 1-Net North Data Centre. The balance will be catered to fund capital expenditure, estimated fees incurred from the fund raising and general corporate purposes.

According to the management’s press release, both acquisitions are slated to be completed in the 4th quarter 2020. They are expected to be highly accretive to Keppel DC Reit's distribution per unit and will boost the Reit's assets under management by 30.7% to S$2.58 billion once completed.

Conclusion

All in all, investors might be spooked by Keppel DC REIT having one of the highest P/NAV ratios and lowest distribution yields among all the S-REITs.

The silver lining is that Keppel DC REIT is set to benefit from the tailwinds of Big Data’s boom. Moreover, assuming that their FY2021 DPU will jump by 30% due to their recent acquisitions, the REIT’s distribution yield will prop up to a more palatable 5% based on their share price of S$2.00.

Keen to analyse other stocks using the above features? Check out our ShareInvestor WebPro’s Free Trial here!

 

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