Too soon to speculate on Bluesea fall out
- KDC has sent a letter of demand to Bluesea for c.S$9.1m in arrears (four months of rent) and S$6m for security deposit top-up.
- We estimate 6.4%/16% downside to our FY23F/24F DPU if Bluesea does not fulfill its rent obligations from Sep 23 to end-FY24F.
- Reiterate Add; 4.8% FY24F DPU yield if Bluesea remains in arrears still palatable, in our view.
0.655 Scts FY23F DPU impact if 4.5 months of FY24F arrears unpaid
On 15 Dec 23, KDC announced it has issued a letter of demand to Guangdong Bluesea Data Development for: (A) arrears of Rmb48.3m (S$9.1m), comprising (1) sum in areasto-date of Rmb45.0m (S$8.5m) comprising 4 months’ rent arrears (for Guangdong Data Centre (GDC) 1, 2 & 3) and coupon pertaining to the Rmb72m (S$155m) advanced payment for GDC3, due as at 15 Dec 23, (2) Rmb3.3m (S$0.6m) in late payment interest and real estate taxes; and (B) request for a security deposit top-up of Rmb32.2m (S$6.0m). The tenant stopped paying rent on 15 Sep 23, and the security deposit was drawn down while management and tenant negotiated an installment payment plan. The tenant was prompt with instalment payments until Oct 23, but missed the Nov 23 and Dec 23 instalment payments. If KDC is unable to recover the 4.5 months of rent and coupon outstanding in FY23F, management guided that FY23F DPU would be 0.655 Scts lower, or 6.4% below our FY23F DPU forecast.
Too much ambiguity
Contractually, KDC can terminate the forward purchase of GDC3 if it is not handed over by 31 Oct 2023 (the long stop date) and receive a refund of the Rmb100m that KSC has paid to date, comprising Rmb28m (S$6m) refundable downpayment and Rmb72m (S$15.5m) advance payment. Management has not extended the long stop date but has sent in its own technical experts to assess the status of construction of GDC3. In an analyst call on 15 Dec 23, management said that it is in talks with its sponsor should there be a need to repossess GDC1 and 2 and operate them as colocation assets. GDC1 and 2’s committed occupancy is 60-80% and c.30% respectively, and they are leased to three Chinese telcos. It is still unclear if it would be possible for KDC to take over and manage these underlying leases directly.
Keep Add; FY24F DPU yield of 4.8% if Bluesea remains in arrears
We leave our FY23F-25F estimates unchanged given uncertainty surrounding the negotiation outcome, but note that there could be 6.4%/16% potential downside to our FY23F/24F DPU if Bluesea does not fulfill its rent and coupon obligations from 15 Sep 23 till end-FY24F, translating into a still palatable 5.1%/4.8% FY23F/24F DPU yield based on its most recent share price of S$1.89 as at 15 Dec 23. Potential re-rating catalysts are the collection of arrears from Bluesea, higher-than-forecast reversions and a faster pace of acquisitions. Downside risks are lower-than-forecast occupancy, which could affect KDC’s topline, and higher-than-expected interest costs, which could erode1 profitability.
