Keppel DC REIT - CIMB Research 2017-01-06: Can KDCREIT be top in class again in 2017?

KEPPEL DC REIT AJBU.SI

Keppel DC REIT - Can KDCREIT be top in class again in 2017?

Organic portfolio weakness, a less visible acquisition pipeline (12-month timeframe) and a strong S$ are reasons for pessimism on KDCREIT, in our view.
In contrast to 2016, when the manager provided explicit guidance on the acquisition of SGP 3, the acquisition pipeline for 2017 is less visible.
We foresee negative rental reversion for the Singapore and Basis Bay leases, which are up for renewal in 2017. It is also taking longer than expected to backfill Dublin 1.

While there are minimal lease expiries in FY18-20F, the flip side is that the trust may not enjoy positive rental reversions if 2018 becomes a landlord’s market.
Reiterate Hold with lower DDM-based target price.

We downgraded KDCREIT from Add to Hold in “Navigating Singapore–Rocky is the new status quo” in 5 Dec 16. While its elevated valuation is an easy “bear” argument to sell the stock – the stock is trading at 1.28x FY16F P/BV and 5.7% FY17F dividend yield – we also flag the following as reasons that could cap its share price performance:
1. organic portfolio weakness,
2. a less visible acquisition pipeline (12-month timeframe), and
3. a stronger S$ vs. currencies in which its foreign-sourced income is denominated.

A big part of the KDCREIT story is powered by acquisitions. The manager has targeted to expand the REIT’s AUM by S$2bn by 2018 (currently S$1.4bn). However, unlike 2016 when it guided for the acquisition of SGP 3, the acquisition pipeline for 2017 is less visible.
We think the two assets in the right of first refusal (ROFR) pipeline (Almere 2 and SGP 4) will not be ready for acquisition by 2017. This also means that the manager has to rely on smaller, overseas third-party deals that may not excite the market.

Around 25.7% of KDCREIT’s rental income or 17% of its net lettable area (NLA) is up for renewal in 2017. For its Singapore lease expiry, we now assume -10% rental reversion, in line with our estimated weighted average negative reversion for its Singapore leases in FY16. As for Basis Bay, we factor in -5% reversion to the prevailing rent at expiry.
Lastly, it has taken longer than expected to backfill the vacant Dublin 1 space. We now expect it to take two years (or by FY18F) to raise Dublin 1's occupancy back to c.75%.

We update our FX assumptions as the REIT’s foreign-sourced income (especially RM and £) has depreciated sharply against the S$. Altogether, we reduce our FY16-18F DPU by 1.5-4.1%. While there are minimal lease expiries in FY18-20F, which spells higher income certainty, the flip side of the coin is that the trust may not enjoy positive rental reversions if 2018 becomes a landlord’s market.

While the above factors should not cause the stock to de-rate (as reflected by our moderate DPU cuts), they could collectively cap KDCREIT’s share price performance in 2017. Hence, we reiterate our Hold rating, with a lower target price as we roll over our DDM valuation (S$1.18).
Upside/downside risks hinge upon acquisition momentum, leasing terms and tax transparency for SGP 3.

YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-01-06

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.18 Down 1.220