Keppel DC REIT (KDCREIT SP) – More moderated growth ahead
• 2H21 DPU rose 2.8% YoY to 4.927 S cents
• Portfolio occupancy improved to 98.3%
• Portfolio valuation uplift, but likely more moderated growth ahead
FY21 results met our expectations – Keppel DC REIT (KDCREIT) reported 2H21 gross revenue of SGD135.9m and NPI of SGD124.3m, representing YoY declines of 4.0% and 4.3% respectively. This was driven in part by an upward non-cash straight-lining adjustment and rental support drop-off in Singapore, but partially offset by contribution from acquisitions and AEIs. As some of these adjustments are non-cash in nature, KDCREIT’s 2H21 DPU grew 2.8% YoY to 4.927 S cents. For the full-year FY21, KDCREIT’s NPI and DPU increased by 1.6% and 7.4% to SGD248.2m and 9.851 S cents, respectively, with
the latter accounting for 101.9% of our FY21 forecast.
Portfolio occupancy inched up to 98.3%, while rental reversions were “stable” – KDCREIT’s portfolio occupancy inched up 0.2 percentage point (ppt) QoQ to 98.3%, as at 31 Dec 2021, reaching a new high since its IPO. Portfolio WALE remains long at 7.5 years by leased area (4.9 years based on rental income). Management highlighted during the analyst call that rental reversions were “stable”, but did not provide any figures.
Portfolio valuation uplift boosted NAV/unit by 12.6% – KDCREIT recorded a revaluation gain in its portfolio by SGD151.4m due to improvement in occupancy and compression in cap rates (from 4.95-10.12% to 4.40-9.31%). This helped to boost its NAV/unit by 12.6% to SGD1.34 as compared to end-FY20 level, and its aggregate leverage declined by 0.5 ppt to 34.6%, with an unchanged average cost of debt of 1.6%. Management has fixed/hedged 74% of its borrowings, with its remaining floating debt denominated in EUR. Looking ahead, given the keen competition for quality data centre assets, we expect accretive inorganic growth opportunities to be harder to come by, while the likelihood of increasing its China exposure also raises its risk profile, in our view. As such we increase our cost of equity assumption to 6.2% (previously 5.8%) and lower our terminal growth rate by 50 bps to 2.25%. After rolling forward our valuation, we derive a lower fair value estimate of SGD2.61 (previously SGD3.15).
ESG Updates
KDCREIT has an ESG rating since Sep 2018. This is also the highest ESG rating within our S-REITs coverage. KDCREIT has adopted strong compliance mechanisms such as employee trainings and audits of ethics standards. The former includes training and development programmes, such as Keppel Young Leaders and Advanced Leadership. KDCREIT also regularly engages with employees through satisfaction surveys and focuses on improving the health and wellness of its personnel. Management has earmarked its commitment to address climate change issues, as illustrated by it being a signatory of the Climate Neutral Data Centre Pact. KDCREIT also said that it aims to halve its combined Scope 1 and Scope 2 emissions by 2030 from a 2019 baseline, and plans to introduce renewable energy to at least 50% of its colocation assets by 2030. BUY. (Research Team)
China Overseas Land and Investment (688 HK) – Still attractively priced relative to major peers
• Share price has outperformed YTD
• Slight increase in contracted sales for 2021
• Raise FV to HKD29.22
Solid rebound in share price YTD – China Overseas Land & Investment’s (COLI) (Stock code: 688 HK) share price has appreciated 27.0% YTD (as at 24 Jan 2022 close), making it the second-best performing stock amongst the major Chinese developers we track (for H-shares). The recent rerating was likely buoyed by some positive news within the Chinese property sector, such as the potential release of pre-sales proceeds held in escrow accounts and possibility that debt undertaken to finance M&A activities of distressed developers will not count towards the debt calculation under the Three Red Lines policy.
Contracted sales grew slightly by 2.4% to RMB369.5b in 2021 – COLI and its group series of companies (including JVs, associates and China Overseas Grand Ocean (COGO)) recorded flat YoY growth in its contracted sales to RMB39.8b for the month of Dec 2021, although contracted GFA rose 12.7% to 2.28m sqm. For the full-year 2021, COLI and its group series of companies registered total contracted sales and contracted GFA of RMB369.5b and 18.90m sqm, representing an increase and decrease of 2.4% and 1.4%,
respectively. The former came in below our expectations. That said, we note that the drag mainly came from its JVs and associates (-28.8% to RMB38.5b). COLI and its subsidiaries’ contracted sales grew 7.4% to RMB259.8b in 2021, while COGO’s contracted sales rose 10.0% to RMB71.2b. In addition, COLI and its group of series companies secured subscribed property sales of ~RMB5.9b, which are expected to be turned into contracted property sales in the following months.
Still prudent on land acquisition; more opportunities to come – COLI acquired 5 parcels of land in Chongqing, Beijing, Changsha, Hangzhou and Jiaxing in Dec 2021, with total attributable GFA of 1.0m sqm and land premium of RMB16.8b. This translates to a land cost of RMB16,815 per sqm. For the whole year of 2021, COLI purchased 10.7m sqm of land with an aggregate land premium of RMB129.8b, or an implied land cost of RMB12,104 per sqm. To put things in perspective, COLI’s ASP for its contracted sales (excluding JVs, associates and COGO) came in at RMB22,700 per sqm in 2021. Although COLI’s total land purchase in 2021 came in below its land budget of RMB165b, we believe it is a sign of prudence by management, especially as land costs remained high in 1H21. We expect more opportunities for land replenishment ahead for COLI as its peers continue to deleverage, notwithstanding some marginal policy easing seen in the sector. After fine-tuning our assumptions, we lower our FY22F core PATMI forecast by 2.8% on slower contracted sales growth estimates, but we are lifting our target P/E peg from 5.6x to 6.5x
(incorporates a slight ESG valuation discount) to account for increasing signs of policy support, which we believe would benefit higher quality SOE developers such as COLI. As such, our fair value estimate increases from HKD25.90 to HKD29.22. COLI is currently trading at consensus forward P/E of 4.9x (as at 24 Jan 2022), which is 1.2 standard deviations below its 10-year mean of 6.6x. It is also trading at a sizeable discount to its close peers Longfor and CR Land, although core earnings growth is also lower as compared to the two.
ESG Updates
COLI has had the same ESG rating since Oct 2018, which suggests that no significant progress has been made on this front for almost three years. COLI is ranked strongly on the ‘Opportunities in Green Building’ category, given that it has certified 70% of its portfolio to green building standards, as compared to only a 29% industry average as of Dec 2020. However, COLI’s corporate governance practices trail those of global peers, notably its board structure, according to ESG Research. For instance, COLI’s board has a lack of independent majority, and having overboarded directors could limit its ability to provide strong oversight of management. Notwithstanding these factors, we note that COLI was one of the first companies to be included in the Hang Seng ESG50 Index, and management appears to be stepping up its focus on ESG matters from our conversation with them.. BUY. (Research Team)