Is Keppel DC REIT's (SGX: AJBU) Share Price of $2.49 a Buy?
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Is Keppel DC REIT's (SGX: AJBU) Share Price of $2.49 a Buy?

Sudhan P
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Right now, Keppel DC REIT‘s (SGX: AJBU) share price (technically known as unit price for REITs) is at $2.49.

Does Keppel DC REIT make a great investment at its current price?

Let’s find out using my 10-step guide to pick the best Singapore REITs.

How to pick the best REITs

As a summary, here are the 10 steps I use to pick the best Singapore REITs:

  1. Growth in Gross Revenue and Net Property Income
  2. Growth in Distribution Per Unit
  3. Property Yield of Between 5% and 9%
  4. Gearing Ratio of Below 40%
  5. Interest Coverage Ratio of Above 5x
  6. Healthy Portfolio Occupancy Rate
  7. Positive Rental Reversions
  8. Presence of Growth Prospects
  9. Acceptable Price-to-Book Ratio
  10. Distribution Yield of Above 5%

Business Background

Keppel DC REIT is focused on data centres and has been listed on the Singapore stock market since 12 December 2014.

Its current portfolio comprises 17 data centres strategically located across 10 cities in eight countries in the Asia Pacific region and Europe.

The following chart shows where Keppel DC REIT’s data centres are located: 

Keppel DC REIT portfolio
Source: Keppel DC REIT earnings presentation

Keppel DC REIT’s sponsor is Keppel Telecommunications & Transportation Ltd (Keppel T&T), a subsidiary of Keppel Corporation Limited (SGX: BN4). 

1. Gross Revenue and Net Property Income (NPI) Check

Check for: Increasing gross revenue and NPI

Keppel DC REIT has a financial year that ends on 31 December each year. The REIT announced its 2019 earnings results on 21 January 2020. 

The following table shows how Keppel DC REIT’s gross revenue and NPI have been over the years:

 20152016201720182019Compound annual growth rate (CAGR)
Gross revenue
(S$' million)
102.599.1139.1175.5194.817.4%
Net property income
(S$' million)
86.990.9125.1157.7177.319.5%

Both gross revenue and NPI have increased in the last five years mainly due to acquisitions, and this bodes well for the REIT’s future. 

Keppel DC REIT acquisitions
Source: Keppel DC REIT earnings presentation

Verdict: Pass

2. Distribution Per Unit (DPU) Check

Check for: Increasing DPU

Keppel DC REIT’s DPU has grown steadily over the past five years, aside from the dip in 2016.

 20152016201720182019CAGR
Distribution per unit (Singapore cents)
6.516.14 7.127.32 7.614.0%

In this aspect, Keppel DC REIT passes the DPU test.

Verdict: Pass

3. Property Yield Check 

Check for: Property yield of between 5% and 9%

Next, let’s look at Keppel DC REIT’s property yield. 

For 2019, Keppel DC REIT had an NPI of S$177.3 million while its valuation of investment properties stood at S$2.64 billion.

The figures translate to a property yield of 6.7%, which is well within my range. 

Verdict: Pass

4. Gearing Ratio Check

Check for: Gearing ratio below 40%

As of 31 December 2019, Keppel DC REIT had a gearing ratio of 30.7%, one of the lowest among Singapore REITs.

Verdict: Pass

5. Interest Coverage Ratio Check

Check for: Interest coverage ratio above 5 times

Keppel DC REIT’s interest coverage ratio, for 2019, stood at around 13.3x, which is high above my threshold of 5x. 

Verdict: Pass

6. Portfolio Occupancy Rate Check

Check for: Healthy portfolio occupancy rate

Keppel DC REIT enjoyed healthy portfolio occupancy rates in 2019.

As of 31 December 2019, the committed occupancy for the portfolio was 94.9%; which is a resounding pass. 

Keppel DC REIT portfolio occupancy
Source: Keppel DC REIT earnings presentation

Verdict: Pass

7. Rental Reversion Check

Check for: Positive rental reversions

Keppel DC REIT’s portfolio weighted average lease to expiry is long at 8.6 years, ensuring income stability for the REIT over the long term.

Also, many of the REIT’s existing leases and co-location arrangements have built-in rental reversion escalations that range between 2.0% and 4.0% per year on average, which is great. 

Verdict: Pass

8. Growth Prospects Check

Keppel DC REIT has strong competitive advantages and growth drivers.

According to Keppel DC REIT’s IPO prospectus, the data centre industry has high barriers to entry due to:

1) The need for substantial upfront costs and significant technical knowledge and expertise;

2) Customers preferring data centre providers with a proven track record; and

3) A lack of suitable sites for data centres.

As data centres are typically mission-critical, clients usually tend to be averse to physical relocations as they operate mission-critical IT processes in data centre facilities. Relocations tend to increase operational risks, including possible downtime and business disruptions. This aspect makes Keppel DC REIT’s clients “sticky”.

In its 2019 earnings release, Keppel DC REIT’s manager gave its take on the industry prospects:

“The Manager believes that the prospects for the data centre market remain robust, buoyed by the digitalisation wave of rapid cloud adoption, smart technologies, big-data analytics, and 5G deployment. According to BroadGroup Consulting, demand for colocation data centres continues to be driven by strong take-up from hyperscale cloud players, and this demand is set to increase with their time-to-market needs.”

On top of industry tailwinds, growth for Keppel DC REIT could also come from acquisitions. 

Keppel DC REIT’s sponsor, Keppel T&T, has granted the rights of first refusal to the REIT for future acquisition opportunities of its data centre assets. Read more about why having a sponsor will help in the acquisition front here

The REIT’s low gearing of around 31% clearly provides it with the financial flexibility to grow further. 

Verdict: Pass

9. Price-to-Book Ratio Check

Check for: Acceptable price-to-book ratio 

At Keppel DC REIT’s current unit price of S$2.49, it has a price-to-book (PB) ratio of 2.2, which is on the higher end.

Verdict: Fail

10. Distribution Yield Check

Check for: Distribution yield to be above 5% 

At Keppel DC REIT’s current unit price of S$2.49, its distribution yield stands at 3.1%. 

A yield of 3% is too low for my liking. Even Singapore-listed banks of DBS, OCBC, and UOB are offering higher dividend yields than Keppel DC REIT at the moment (although banks come with a different set of risks). 

Verdict: Fail

The Final Verdict

Keppel DC REIT has a final score of 8/10.

The REIT has plenty of investment merits. Some of them are:

  • Growing gross revenue, NPI, and DPU;
  • High property yield;
  • Strong balance sheet; 
  • Healthy portfolio occupancy rate; and 
  • Compelling growth prospects.  

However, I’m not comfortable with the REIT’s high PB ratio and low distribution yield to put my money into it right now.

Therefore, I’m putting Keppel DC REIT on my watchlist. 

What Are Your Thoughts on Keppel DC REIT?

Why not check our Seedly Community and drop your question or analysis on Keppel DC REIT there.

Stock Discussion on Keppel DC REIT

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock.

About Sudhan P
It isn't fair competition when only one company in the world makes Monopoly. But I love investing in monopolies. Before joining the Seedly hood, I had the chance to co-author a Singapore-themed investment book – "Invest Lah! The Average Joe's Guide To Investing" – and work at The Motley Fool Singapore as an analyst.
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