Every byte counts
- Strong FY21 earnings driven by contributions from Asset Enhancement Initatives (AEIs) and acquisitions
- Singapore portfolio reported >11% uplift in valuations due to improved earnings and tightening cap rates
- Concluded c.S$400m of accretive acquisitions and investments in FY21 despite stiff competition for data centres
- Maintain BUY with a revised TP of S$2.80
Investment Thesis
Resuming growth trajectory. The recent completion of the Guangdong Data Centre and London Data Centre has reignited optimism on KDCREIT’s growth trajectory. In addition, an ROFR has been granted for the other five data centres within the Guangdong Data Centre campus. However, we have revised down our acquisition yield assumptions given the rapid cap rate compressions seen in data centre assets globally.
DPU growth CAGR of c.6% over the next two years. DPU is expected to grow by a CAGR of c.6% from now till FY23, driven by recent acquisitions, organic growth from past AEIs and developments, and further potential acquisitions by the end of FY22. Given its debt headroom, we have assumed S$300m worth of acquisitions at an implied yield of c.5% by the end of FY22 in our estimates.
Market dynamics supportive of further growth. KDCREIT’s current portfolio occupancy of more than 98% is the highest since its IPO in 2014. The continued strong demand for data centre capacity amid the prolonged COVID-19 outbreak and rise of the digital economy would support higher occupancies and revenues across its portfolio in the foreseeable future.
Valuation:
Our target price of S$2.80 is based on DCF, assuming a WACC of 5.8% (risk free rate of 2.5%). We have pencilled in S$300m of acquisitions by end of FY22.
Where we differ:
Execution of pipeline. We have assumed a total of S$300m worth of deals in our estimates as its acquisition growth strategy resumes, driving a DPU CAGR of c.6% from FY21 to 23F.
Key Risks to Our View:
Competition from larger third-party data centre players. KDCREIT may face higher barriers to entry and stiffer competition from international operators/funds that are also looking to grow their footprint and attract tenants.