What an explosive bull run! From $1.00 in 2016, Keppel DC REIT share price went on a rampage to reach a high of $2.00 in 2019, representing a 100% increase in value within a span of just three years. Unitholders of Keppel DC REIT must be laughing all the way to the bank. Amid the current rally in S-REITs sector, is the current form of Keppel DC REIT share price sustainable?
Hailed as the first pure-play data centre REIT listed in Asia on SGX, Keppel DC REIT is certainly riding on Singapore’s aspiration to become the Smart Nation. During its IPO, the portfolio comprised of only eight data centres. In the blink of eye, the portfolio has grown to 15 data centres spanning across Asia and Europe. The number of data centres will rise further to 17 as Keppel DC REIT is recently acquiring two data centres in Singapore – KDC SGP 4 located in Tampines Industrial Park and 1-Net North DC in Woodlands. As 67% of the portfolio is in Asia while 33% is in Europe, the management has built a diversified portfolio indeed.
Being a data centre service provider, Keppel DC REIT is an interesting long-term REIT play because the business is relatively immune to economic cycles. During market downturns, people are likely to shop less at shopping malls and dine out at restaurants less often. However, it is unlikely that people will reduce their usage of data even during market downturns. Furthermore, with 5G rolling out, demand for data will only increase exponentially in the future. Thus, if the management played the cards right, the long-term prospect would be very bright for this S-REIT.
One of the biggest merits of Keppel DC REIT is that the weighted average lease expiry (WALE) is 7.8 years. This is much longer than the typical 2-3 years in S-REITs that focus in shopping malls, commercial offices and industrial spaces. The long WALE of Keppel DC REIT will provide much income stability while at the same time, many of the leases and co-location arrangement have built in rental reversion escalations ranging from 2% to 4% per annum on average.
Another selling point of Keppel DC REIT is that it occupies a niche and high-growth sector. Proliferation of internet and increase in mobile phone users will fuel data creation like video streaming and online contents. Against this background, the demand for data storage will continue to surge. Based on the past five years’ financial results of Keppel DC REIT, this was indeed the case. Revenue surged from $54 million in FY2014 to $176 million in FY2018. Corresponding, net income increased from $32 million to $141 million. The data validated the growth projection and vindicated the growth outlook for Keppel DC REIT.
Being 23.5% owned by Temasek Holdings, Keppel DC REIT seems like a safe and exciting bet. Question now is whether is this the right time to enter this counter given the massive rise in unit price? Is the current DPU sustainable? In this article, the financial data of Keppel DC REIT will be examined.
Keppel DC REIT in wonderland
As of 3 October 2019, Keppel DC REIT is trading at +82% to its net asset value of $1.06. This means that this counter is currently being priced at a level way above its book value. The huge run-up to the share price also led to dividend yield to drop to 4.6%. The DPU yield is relatively lower than many of its peers in the S-REITs sector. Thus, if you are a dividend investor, then current share price of Keppel DC REIT may not be compelling enough for you to accumulate more.
Then again, who knows whether the share price will [This is a premium article. The rest of the content is blocked and can be accessible by SG Wealth Builder Members only. To read the full content, please sign up as member.]
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