On June 3rd, DBS Group Research lowered Singapore-based Keppel’s DC Reit’s (KDC REIT) target price to S$2.40.
This development occurred after the research team lowered its estimates for KDC REIT’s earnings, to adjust for rising utility costs and interest rates.
However, DBS continues to maintain its “buy” call on the data-centre focused real estate investment trust (REIT) because KDC REIT’s potential 5% yield for financial year 2022 were still “too attractive to ignore”.
In addition, although KDC REIT’s target price was lowered, the new target price still estimates a target yield between 4.2% and 4.5% over the next three years.
Accounting for DXC Technology’s Partial Default
DXC Technology’s partial default on KDC REIT also affected KDC REIT’s target price. DXC Technology had been a tenant at Keppel DC Singapore 1, one of KDC REIT’s data centres, which had allegedly defaulted on payments to Keppel DC for use of its colocation services at the data centre. DXC Technology currently disputes their liability to make payment.
DBS estimated a partial loss of income from KDC REIT’s litigation suit against DXC for a partial default of rental payment, with around 14.8 million SGD being disputed. As a result of the legal proceedings, DBS Group Research has accounted for an annual absence of 3.7 million SGD over the next three years.
Data Centres Still the ‘Oil’ for the Digital World
DBS anticipates that KDC REIT’s near-term earnings will likely be affected by higher operating costs. Nonetheless, the REIT’s interest rate is still protected from excessive fluctuation, because around 76% of KDC’s borrowings are hedged to fixed rates.
On the other hand, while KDC REIT’s near-term earnings are protected from volatile foreign exchange because the firm typically hedges its income in foreign currencies up to two years in advance, KDC REIT’s medium-term earnings (in financial year 2023) are likely to be affected by volatile foreign exchange.
However, DBS observed that the target price correction provides investors with an opportunity to “buy growth at attractive prices”. DBS equity research analyst Dale Lai said that “We remain convinced that data centres remain the ‘oil’ for the digital world post Covid-19, with demand exceeding supply, which translates into a continuously tight transaction market with improving operating metrics.”
Despite these potential setbacks, KDC REIT remains a preferred play in DBS’s value metrics, because it can still offer superior growth to investors, through its sponsors which are both owners and operators of data centres.
Ultimately, KDC REIT has support from strong backers, which enhances its attractiveness and standing in the market. For instance, Keppel Capital Holdings Pte. Ltd. Has secured Asian Infrastructure Investment Bank as an investor for the Keppel Data Centre Fund II, closing the deal with total commitments of 1.1 billion USD.
On its own, KDC REIT has also made significant investments and acquisitions overseas. In Jiangmen, Guangdong Province, KDC REIT has previously sealed agreements with Guangdong Bluesea Data Development Co. Ltd. (Bluesea) and its parent company, Guangdong Bluesea Mobile Development Co. Ltd., to acquire Guangdong Data Centre, a fully-fitted data centre facility in for RMB 635.9 million.