Introduction to Keppel DC REIT

Keppel DC REIT, the first pure-play data centre REIT in Asia, has continued to make significant strides in the real estate sector, focusing on income-producing assets primarily for data centre purposes. With its shares listed on the SGX since December 2014, Keppel DC REIT has a diversified portfolio that continues to expand.

Current Market Performance

As of the latest company update, Keppel DC REIT is maintaining a ‘BUY’ recommendation with a share price of S\$2.19 and a target price of S\$2.64, indicating a potential upside of 20.5%. The market capitalization stands at S\$3,778.4 million (approximately US\$2,821.4 million), and the company is attracting significant attention with a 3-month average daily turnover of US\$10.2 million.

Recent Developments and Strategic Acquisitions

Keppel DC REIT is poised to benefit from the growing demand for AI-driven data solutions. The acquisition of two AI-ready hyperscale data centres, SGP7 and SGP8, located at 82 Genting Lane in Singapore, is a strategic move aimed at capturing AI tailwinds. These facilities are designed to support AI inference workloads, offering ultra-low latency connectivity crucial for AI applications.

The S\$1.38 billion acquisition from a joint venture between Keppel’s Connectivity Division and Cuscaden Peak Investments is expected to enhance the company’s income resilience. SGP7 has already achieved full occupancy post-its temporary occupation permit in March 2023, while SGP8 is anticipated to be fully occupied by the third quarter of 2025.

Financial Performance and Forecast

Keppel DC REIT has reported steady financials, with net turnover expected to rise from S\$277 million in 2023 to S\$422 million by 2026. The EBITDA is projected to increase significantly, reaching S\$332 million in 2026 from S\$208 million in 2023. Moreover, net profit is forecasted to grow to S\$265 million by 2026, marking a notable recovery from the S\$114 million reported in 2023.

The company is leveraging its financial strategy by maintaining a balanced mix of equity and debt to fund its acquisitions. The aggregate leverage is expected to decrease from 39.7% to 37.9%, with management fees for the new data centres being partially paid in new units. This financial prudence is aligned with the company’s goal to enhance its income resilience and capitalize on market opportunities.

Growth Strategies and Future Prospects

Keppel DC REIT is actively scouting for acquisition opportunities to expand its portfolio, particularly in regions like Singapore, South Korea, and Japan. The company is also exploring asset enhancement and redevelopment possibilities, especially if additional power can be secured for its data centre in Frankfurt, Germany.

With the proposed acquisition expected to be accretive to the 1H24 DPU by 8.1%, the funding strategy involves a mix of equity fundraising and debt facilities. The equity fundraising is fully underwritten, expected to raise S\$973 million, supplemented by a debt facility of S\$451 million at a cost of approximately 3.5%.

Conclusion and Analyst Recommendation

UOB Kay Hian maintains a ‘BUY’ recommendation for Keppel DC REIT, with a target price set at S\$2.64 based on a discounted dividend model (DDM) with a cost of equity at 6.75% and a terminal growth rate of 2.5%. The acquisition of SGP7 and SGP8 is anticipated to boost the company’s 2026 DPU forecast by 6%, presenting significant growth potential.

Investors are advised to keep an eye on Keppel DC REIT’s strategic moves, particularly its ability to leverage AI trends and expand its data centre footprint. With strong demand for colocation space driven by AI applications, and a robust acquisition pipeline, Keppel DC REIT is well-positioned for future growth.