Alert: Clarification on earnings sensitivity to rising costs
- Some confusion arose from the sensitivity analysis provided for rising electricity costs
- KDCREIT has clarified that impact of rising electricity costs to DPU is significantly lower than earlier thought
- The impact of rising electricity costs on earnings have largely been reflected in 1Q22 results; do not expect any further impact to be significant
- Maintain BUY with TP of S$2.80
Impact of rising electricity costs have already been reflected
- Some electricity contracts have been renewed in 1Q22, and the bulk of higher electricity costs likely to have already been reflected in 1Q22
- Bulk of wholesale contracts for electricity has been fixed until the end of this year
Further increase in electricity costs to have a smaller impact to earnings
- Looking ahead, a 10% increase is estimated to have a 0.009 scts impact to 1Q22 DPU ( or 0.4%, annualised impact of 1.5%)
- However, as a large proportion of contracts have been fixed (until end of this year), we believe impact to earnings will likely be significantly less
With the clarification, we are comforted that KDCREIT will be largely shielded from any further material impact to earnings from rising electricity costs. As a large proportion of their electricity contract already fixed until the end of this year, we do not expect any significant deviation in operating costs as what was shown in 1Q22.
Looking ahead, organic growth within the portfolio and full quarter contribution from recent acquisitions will drive some organic growth in earnings. As such, we will be maintaining our BUY recommendation with a TP of S$2.80.