News Analysis: Courts ruled in KDCREIT’s favour over dispute with DXC
- The High Court has ruled in KDCREIT’s favour over claims on outstanding rents (S$3m) in FY21 for part of DXC’s lease in dispute
- The remaining c.S$11.8m in dispute will be heard in trail in February, and we believe this ruling serves as a pivotal development in KDCREIT’s favour
- Contested amounts have been recognised as provisions, and will be a boost to earnings once amounts are received
- Maintain BUY with TP of S$2.45; remain cautious on ongoing concerns with Guangdong DCs
What has happened?
The Singapore High Court has ruled in favour of KDCREIT in its dispute with DXC Technology Services (DXC). In March 2020, DXC had renewed its lease for Keppel DC Singapore 1, committing to a five-year term. However, a unilateral decision by DXC led to the relinquishment of a portion of the leased space starting from April 1, 2021. The original lease covered a total area of 20,300 sqft, divided into four modules (A, B, C, and D). Notably, DXC expressed the desire to surrender modules C and D, a proposal that KDCREIT did not accept. The estimated annual rental amount for the disputed modules is approximately S$3.7 million, summing up to a total of S$14.8 million over the remaining four-year lease period (April 2021 to March 2025). The recent High Court ruling favoured KDCREIT, acknowledging its claim of S$3m for outstanding rents from April 2021 to December 2021. This ruling serves as a pivotal development, setting the stage for the upcoming trial scheduled for February.
Our views.
The ruling by the High Court in favour of KDCREIT marks a positive development, given that the disputed amount represents approximately 2% of the REIT’s annual distributable income. Notably, KDCREIT has demonstrated prudence by accounting for the contested rents as a provision since April 2021. Any amounts recovered from this case will be considered additional income. While the trial for the remaining amount of approximately S$11.8 million is slated for next month, the current ruling is viewed as a promising initial step in KDCREIT’s pursuit of the disputed space. Our existing projections have already factored in the absence of income from this contested area with DXC. Any sums awarded to KDCREIT in subsequent proceedings will serve as a positive earnings boost.
Amid lingering concerns regarding KDCREIT’s Guangdong DCs, we believe that the favourable outcome in the DXC case will bring some relief. At this juncture, we maintain our BUY recommendation with a target price of S$2.45.