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Friday, July 31, 2020

Keppel DC REIT Analysis @ 31 Jul 2020

Basic Profile & Key Statistics
Keppel DC REIT (KDC) is a pure data centre REIT listed on 12 December 2014. Since listing, its share price has been increasing as many are positive on the Data Centre prospect.

Lease Profile
Occupancy is healthy at 96.1%. From the latest quarter presentation, the WALE is at 7.4 years by lease area. I would prefer to have WALE by gross revenue income, as REIT can lease big areas with discounted rental. A rough estimation from Annual Report, WALE by GRI would be 4.57 years, which is slightly higher than SREITs median. KDC highest lease expiry of 29.4% by rental income falls in the year 2021, which posts a concentrate lease expiry risk. Weighted average land lease expiry is short at 55.66 years.

Debt Profile
Gearing ratio is healthy at 34.5%. Cost of debt is very low at 1.7% despite 100% unsecured debt. Fixed rate debt of 69% is low. Interest cover ratio is high at 12.8 times. WADE is long at 3.7 years where the highest debt maturity of 39.3% falls in the year 2025, this posts a concentrated debt maturity risk.

Diversification Profile
KDC diversification in geographical is at a healthy level of 55.1% (by valuation). KDC top property in terms of valuation is low at 14.6%. However, its top tenant and top 10 tenants contribution by rental income are high at 41% and 81.1% respectively.

Key Financial Metrics
Property yield is high at 8.1%. Management fee is moderate in which shareholders received S$ 7.19 for every dollar paid. Both distribution on capital and distribution margin are high at 4.8% and 59.2% respectively. For the past 4 quarters distribution, 2.9% of distribution is from income support.

Related Parties Shareholding
All REIT sponsor, REIT manager, and directors of REIT manager holding less stake than SREITs median. 

Trend
DPU and NAV per unit are on uptrend for the past 5 years. Distribution margin wise, it is on a downtrend but increases for the past 4 quarters.

Fundamental Valuation
Favorable Less Favorable
Cost of Debt Concentrated Lease Expiry
Unsecured Debt Weighted Average Land Lease Expiry
Interest Cover Ratio Concentrated Debt Maturity
WADE Top Tenant & Top 10 Tenants Contribution
Top Property Contribution
Property Yield
Distribution on Capital
Distribution Margin
DPU Uptrend
NAV per Unit Uptrend
Based on the above, it is obviously KDC is a well managed REIT and come with good prospects for its data centres growth. I notice now KDC behaves more like a growth stock. 

Relative Valuation
i) Average Dividend Yield
Apply past 4 quarters DPU of 8.135 cents to average value of 5.27% will get S$ 1.54. 
ii) Average Price/NAV 
Apply NAV of S$ 1.171 to average value of 1.41 will get S$ 1.65.

Author's Opinion
I've noticed investors are currently looking at the positive sides and ignoring the negative points e.g. concentrated tenant contribution, concentrated lease expiry, concentrated debt maturity, concentrated tenant trade and etc. What view to be risky and negative for other REIT, suddenly do not apply to KDC anymore. In view of potential inclusion into STI in near future, KDC price would be likely to soar higher. However, what would happen if there are other pure data centre REITs listed in SGX in the future? For valuation: 
i) Fundamental Intrinsic Value = (Removed)
ii) Relative Valuation - Dividend Yield = S$ 1.54
iii) Relative Valuation - Price/NAV = S$ 1.65
At the current price of S$ 2.98, it looks overvalued. Since KDC is now performing like a growth stock, you may want to consider evaluating KDC based on growth stock methods.

*Disclaimer: Materials in this blog are based on my research and opinion which I don't guarantee the accuracy, completeness, and reliability. It should not be taken as financial advice or statement of fact. I shall not be held liable for errors, omissions as well as loss or damage as a result of the use of the material in this blog. Please always do your own due diligence before any decision is made.

4 comments:

  1. This is the best ever REITs I have owned. I wished I have put all my local investments in this KDC which I don't.

    Yes, $3 is too high. Last year I also think $2.5 is too high. Then during Covid Crisis, it dropped slightly, still, I thought it was a bit high.

    But instead of buying more during Covid, I cash out to achieve "free hold" status, before putting all my winnings back into the stock at a higher price.

    Sometimes you can see how silly I am.... hahaha.

    So now the question is how to value a growth Reit versus traditional retail/commercial/residential Reit?

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    1. Haha, your first sentence is definitely hindsight talk, u said best because price go up, if price go down you will say is worst. You are CONFIRM NOT SILLY, else your wife won't get better job with increment somemore. I got read your post leh.

      In my opinion, the price increase if not due to retail investors. We retail investors are just small fry, KDC price is likely pushed by institutional fund (or related party???). Maybe with the agenda of pushing KDC into STI index.

      Haha, I think growth REIT should value through growth stock method which I am not familiar with. Traditionally, REIT is more for yield and less for capital, but this KDC totally work the other way round.

      However, there are some key risks with KDC, I feel that retail investors are just ignoring it. But if those key risks are for other REIT, they would just blow up and say is bad.

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  2. Hi Vince, haha. Yes, it is hindsight talk, but still it incorporates foresightedness, because I still believe in the future growth potential of the stock.

    Of course, institutional investors play a bigger role. Not sure if entering STI will give any benefit to the stock.

    Every stock have risks. I remember when I was still younger in real business world, my ex-boss tell me if there is no risk, it is not call business.

    The key is not risk, the key is how much risks not just in relation to the Financial of the Stock but also the future bigger landscape and also how the management of the company is managing that risks. Often times no risk, no growth.

    Look at the growth of Tech Stocks. Many when they first started, there are no income, and yet institutional investors enter into it.

    Again, my ex-boss told me once: as long as out of ten, you win more, it is ok. Or the one that win, is more than those that you lose. :-)

    ReplyDelete
    Replies
    1. KDC entering STI will see price boost lo, haha, this benefit alone is very good enough. Not every investor is experience and diligence like you, you practicing "calculated risk", but other practice "ignoring risk", haha.

      Agree with you we can win all the time, just need to ensure win (in terms of earning) more than lose. My current approach is more to minimize chances of losses rather than maximize chances of gains. Still a lot to learn for me.

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