Strong demand underpins stable income
? KDC’s FY21 DPU of 9.851 Scts (+7.4% yoy) came in line with our forecast.
? Stronger performance was mainly driven by acquisitions, AEIs and higher occupancy rate.
? Reiterate Add. KDC offers resilient income, which limits price downside risks in a volatile market.
Acquisitions and AEIs drove stronger performance
Keppel DC REIT’s (KDC) FY21 revenue increased 2.1% yoy to S$271.1m, driven by AEI contributions from Dublin and Singapore assets, full-year contribution from Kelsterbach and Amsterdam DC, as well as the acquisitions of Eindhoven and Guangdong DC. This was partially offset by the cessation of excess rent paid to the vendor at Kelsterbach DC, the divestment of iseek DC and absence of one-off revenue and expenses reduction from Singapore colocation assets. FY21 NPI increased 1.6% yoy to S$248.2m, while DPU (including advanced distribution of 1.421 scts due to a private placement launched on 12 Aug 2021) increased 7.4% yoy to 9.851 Scts, in line at 100.4% of our full-year forecast. On a yoy basis, 2HFY21 revenue and NPI declined c.4% mainly due to one-off items.
Strong demand to continue to support rental reversion
Portfolio occupancy was 98.3%, the highest since its listing in Dec 2014, while WALE lengthened from 7 years to 7.5 years, enhancing income stability. We note that rental reversion in 2021 was stable, and we expect KDC to continue to deliver stable rental reversions in 2022F, as it continues to see strong demand for data centres. Some 18.7% of its leases by rental income are due to expire in 2022. While the potential lifting of the moratorium on new data centres in Singapore would introduce more supply, it would take time for new data centres to be built, and we believe the firm demand and strong stickiness of tenants would continue to support KDC’s rental income.
In a good position to acquire, despite cap rate compression
In line with the strong demand for data centres globally, KDC’s portfolio continues to experience cap rate compression (Asia Pacific: from 5.25%-10.12% in 2020 to 5.25%- 8.75% in 2021; Europe: from 4.95%-8.26% to 4.4%-9.31%). Despite this, we believe KDC is in a good position to acquire yield-accretive assets, given its relatively low cost of funding. We understand its focus will be on larger acquisitions for more meaningful impact on its growing portfolio. KDC’s gearing remains healthy at 34.6%, which provides sufficient debt headroom for inorganic growth.
Reiterate Add
We raise our FY22-23F DPU by 2-3%, factoring in completed acquisitions. Our DDM-based TP, however, is reduced to S$2.70 as we raise our cost of equity assumption in view of the increasing interest rate environment. We continue to like KDC for its earnings resilience and stability, which limits its share price downside risk in a volatile market. Re-rating catalyst/downside risks are faster/slower-than-expected pace of acquisitions.