Brokers' take: Analysts raise target prices for Keppel DC Reit on acquisitions, AEIs

DBS Group Research and CGS-CIMB have raised their target prices for Keppel DC Reit, citing expected acquisitions and ongoing asset enhancement initiatives (AEI) at the real estate investment trust's (Reit) data centres.

In a research report on Wednesday, DBS analysts Dale Lai and Derek Tan raised the price target to S$2.80 from S$2.55. CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee in a Tuesday report raised their target price to S$2.88 from S$2.17

Both sets of analysts maintained their "hold" calls.

Units of Keppel DC Reit were trading flat at S$2.75 as at 11.35am on Wednesday.

In their report, Mr Lai and Mr Tan said they raised the price target to reflect current market conditions and factor in improved efficiency of properties.

They maintained their "hold" call as the Reit's unit price is at an all-time high, after rallying more than 8 per cent over the past two weeks. The stock has only a 2 per cent potential upside, and is trading at a forward yield of 3.2 per cent, they said.

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Meanwhile, Ms Eing and Ms Lock noted that while Covid-19 had fuelled further demand and underpinned the importance of data centres, this demand had been priced in.

They raised their FY21-22 distribution per unit (DPU) forecast for the Reit by 4-4.5 per cent, and rolled over their FY21 target price to S$2.88, after factoring in a S$300 million acquisition and reducing their cost of equity assumption.

The Reit on Tuesday posted a DPU of 4.375 Singapore cents for the half year ended June 30, up 13.6 per cent from 3.85 cents a year ago.

Ms Eing and Ms Lock noted that the Reit's "strong" results were mainly driven by the acquisition of its Keppel DC Singapore 4 and DC1 data centres in Q4 2019, and its Kelsterbach data centre in May 2020.

"On the acquisition front, we understand that Keppel DC Reit is close to finalising a deal, which could happen as soon as Q3," they added. "The Reit is evaluating a wide range of deals which include new and existing countries with cap rates in the range of 4-7 per cent."

As the sponsor's assets will not be ready in 2020, acquisitions in 2020 will be from third parties, Ms Eing and Ms Lock said.

In their report, DBS's Mr Lai and Mr Tan also noted that the Reit was "on track to deliver acquisitions in FY20", even though prolonged travel restrictions due to the Covid-19 pandemic had hampered acquisition plans, especially as the Reit is targeting overseas acquisitions.

"Even though we are past the half-year mark for FY20, we believe Keppel DC Reit will speed up its acquisition momentum as it has been working on these deals throughout the lockdown period," they added.

Mr Lai and Mr Tan said the Reit's low weighted average cost of capital was "a plus for any equity fundraising exercise, as almost any deal is likely to be accretive".

"Despite this, we are confident that management will acquire responsibly and are not averse to lower yielding acquisitions, as long as there is long-term income stability and future growth potential," they added.

The DBS analysts also cited higher-than-expected growth and returns as a potential catalyst, noting that the Reit's AEIs and development projects had been delayed due to the pandemic.

"As works gradually resume, catalysts to look out for include shorter-than-expected delays to project completions and acquisitions that are more accretive than projected," they said.

In their report, CGS-CIMB's Ms Eing and Ms Lock also noted that Keppel DC Reit's ongoing AEIs could "drive organic growth".

The AEI at its Keppel DC Dublin 1 data centre had resumed and is expected to be completed in the second half of the year, subject to further delays caused by the pandemic. The Reit also commenced works to convert additional space at Keppel DC Dublin 2 into a data hall, with an expected completion in the first half of 2021, they added.

However, AEIs for the Reit's Keppel DC Singapore 5 and DC1 data centres in Singapore remain suspended. They were originally scheduled to be completed in the second half of the year, the analysts said.

The additional power capacity at Keppel DC Singapore 5 has been fully committed by an existing client, while the Reit is in talks with potential clients to take up additional power capacity at Keppel DC Dublin 1 and Dublin 2.