Analysts are remaining mixed on Keppel DC REIT’s prospects with CGS International analyst Lock Mun Yee keeping her “add” call and PhillipCapital’s Darren Chan retaining his “neutral” rating. Lock kept her target price unchanged at $2.48 while Chan increased his estimate to $2.25 from $2.16.
In her Jan 24 report, Lock notes the REIT’s strong rental reversions of a positive 39% in FY2024 and expects the “robust momentum” to extend into FY2025 from renewals in Singapore. In the REIT's results call, Loh Hwee Long, CEO of the manager, said that the team remains "very optimistic" about the "current state of matters" in the city-state.
With its low gearing of 31.5% as at the end of December 2024, Lock believes the REIT remains “well-positioned” to continue seeking inorganic growth. The REIT’s gearing fell by 820 basis points (bps) after its equity fund raising (EFR) exercise in 4Q2024 to buy KDC SGP 7 and KDC SGP 8. Its average cost of debt also slipped to 3.1% in 4QFY2024 while its interest coverage ratio (ICR) improved q-o-q to 5.3 times as at the end of the year.
“Management has indicated that it will continue to look for value creation opportunities via strategic acquisitions, and leverage on positive market trends, including generative artificial intelligence (AI),” Lock writes. Management also guided for costs to remain in the low 3% range for FY2025.
During the call, Loh noted that some markets on the REIT’s radar include Japan, South Korea and developed markets in Europe. He added that acquisitions moving forward are likely to be “more chunky” in nature simply because data centre assets are getting larger.
Of course, how the REIT funds these acquisitions will depend on the profile of these assets, to which the REIT manager will have to “calibrate accordingly”, says Loh.
According to Lock’s estimates, Keppel DC REIT’s distribution per unit (DPU) for the 2HFY2024 and FY2024 ended Dec 31, 2024, stood above her expectations at 53.7% and 103.7% of her full-year forecast.
The REIT’s FY2024 DPU also met the expectations of PhillipCapital’s Chan.
Like Lock, Chan likes the REIT’s strong portfolio rent reversion. He also likes its high portfolio occupancy of 97.2% and its stronger balance sheet, with its improved gearing and average cost of debt. Finally, the analyst likes the REIT’s higher portfolio value, which stood at $4.83 billion, 34.1% higher y-o-y.
That said, he remains concerned over the rentals at the Guangdong data centres. The data centres’ master lessee, Bluesea, still owes $30 million in rent.
To this end, CGSI’s Lock and Chan have lowered their DPU expectations. Lock has lowered her FY2025 estimate by 0.05% and by 1.3% for FY2026.
Chan has lowered his FY2025 DPU estimates by 4% as he factors in recent acquisitions, the expanded unit base from the EFR exercise, as well as the continued lack of rentals from the Guangdong data centres.
That said, he expects the REIT’s rental reversions to remain strong going into FY2025, exceeding 30% for most of the 15.4% of leases due for renewal by rental income. This is expected to be mainly from Singapore co-location renewals.
Per Chan’s estimates, Keppel DC REIT is currently trading at an FY2025 DPU yield of 4.5%.
In a Jan 27 note, DBS Group Research analysts Dale Lai and Derek Tan have kept their "buy" call with a higher target price of $2.50 from $2.20 previously. Keppel DC REIT's FY2024 DPU, which was driven by strong rental reversions, surpassed their estimates.
In their view, the recently-completed acquisition of KDC SGP 7 and KDC SGP 8 is expected to be accretive to the REIT's DPU by 8% to 11%.
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"The $1.4 billion acquisition will also significantly increase Keppel DC REIT’s portfolio exposure to power-constrained Singapore, where demand for data centres is expected to outpace available capacity," they write.
The research team at OCBC Investment Research (OIR) has also kept its "buy" call on Keppel DC REIT, as it cheers its "solid turnaround story". The REIT's 2HFY2024 and FY2024 DPU stood above the team's full-year expectations.
"We believe this set of results marks Keppel DC REIT’s solid turnaround story, as previously soured sentiment over rental arrears from its Guangdong data centres have been mollified by strong organic growth in Singapore and the DPU accretive acquisitions of two high quality data centres in Singapore, which would also reduce its percentage portfolio exposure to China," the team writes in its Jan 27 report.
"We believe the street has factored in little or no distribution income from China in FY2025 (we assume zero income), and hence any meaningful recovery of rental arrears would provide upside surprise to investors’ sentiment, although the situation is likely complicated by uncertainties over potential tariffs from the Trump administration," it adds.
Despite the positive sentiment, the team has lowered its target price to $2.43 from $2.44 previously. It has also forecasted the REIT's DPUs for FY2025 and FY2026 to grow by 4.4% and 16.1% respectively.
As at 3.43pm, units in Keppel DC REIT are trading 15 cents lower or 6.61% down at $2.12.
