Disclaimer: Deddy is not a professional whatsoever. This article is only based on his limited research, effort and experience and should not be taken as a piece of advice. This article is also not an indication of buying or selling of any mentioned investment assets.
I do plan to write another stock analysis of my version but I didn’t expect it to be back to Keppel DC REIT. I mean, they recently released their 1H FY2024 result, which involves the updated dividend and dividend yield. How not to?
However, in this article, there won’t be any comparisons with its peers because I had done it before here, which happened in early July. Thus, I will be focusing more on Keppel DC REIT itself and its financial performance. The reason being me trying to look from an investor’s perspective checking out the performance of a business he/she invests in.
So I attempt to analyse this based on the 1H FY2024 report. As usual, if there is anything that I miss or I should know about, do voice it out and I thank you for your feedback.
This result is for the first half ended 30 June 2024. The first couple of things that caught my eyes are their acquisitions, investments and divestments. I mean, how not to, when the first few slides they showed were nice numbers and how good their acquisitions were.
As someone that doesn’t trust managers much, I decided to look into the figures instead. So, in terms of acquisitions, they recently acquired a data center in Tokyo, Japan. It is supposedly the second largest data center hub in Asia. So, that sounds promising.
What about the new Tokyo’s data center’s statistics? Here it is:
- Occupancy: ~98.2% (don’t be fooled by their slide, they put 100% there in their first slide). But still, this is impressive.
- WALE: ~6.6 years. They initially put ~7 years which raised my eyebrows. However, 6.6 is still pretty good. At least we know it has stability until at least the near-mid term.
- Expected completion date of acquisition: 3Q 2024. This means we should be able to see the results, let’s say the 4Q 2024 or 1Q of next year.
Now that was a pretty good start for Keppel DC. What about the divestments?
It was Intellicentre Campus. Now, I have no idea how good or bad this campus is, but at 148.6% premium to the original investment value? I would take it. More importantly, what do they do with the proceeds? Part of the sales proceeds were re-invested into an Australia Data Centre Note with an initial yield of approximately 7%, with an annual inflation-linked escalation. Yeah, I just write whatever they say here, but basically, they still have income in which also means it is good for us. On another note, this also means it maintains exposure to the Australia data center market, although not directly. Still a plus point.
On another news, Keppel DC REIT finally settles with DXC Technology Services Singapore Pte. Ltd. (which I happen to know so well due to my day job…). This means good news. Apparently, the settlement sum received relating to that dispute will be distributed in two equal tranches on a half-yearly basis for FY2024. This is a good one time bonus for the unitholders.
On the not so good news side, there is an impact from the less favourable foreign exchange hedges for foreign-sourced income in 1H 2024. Also, there is a loss allowance made for the receivables from the Guangdong data centers. shake head
Either way, the news seem to be alright, nothing seems to bad except we still have to monitor the situation in China and how the management will maneuver.
Going into the figures themselves, the revenue improves around 11% both HoH and YoY, which is good. On the net property income (NPI) side, it also improves both HoH (by 12.8%) and YoY (by 4.2%). Looking at these, Keppel DC REIT seems to be doing good!
However, when you look at the property expenses, this spooks me. HoH, it increases about 6%. YoY it is about 87.1%! 87.1!
Look at them taxes, they seem tough too..
All I see is more money being deducted from the income and revenue..
Despite all the scary things, looking at its DPU, it improves about 5% HoH even though it decreases YoY by 9.9%. On the bright side, it still has improved. We just have to monitor for the near term, upcoming results to ensure it keeps on improving.
It has a current distribution yield of about 4.9%, which is not bad, although I know investors would ask for more in the current market situation. It also has a NAV of 1.37 which means its P/NAV ratio is about 1.39 (based on the price $1.9 as of 27 July 2024). After I rechecked with my last analysis earlier this month, it was also 1.39, so not much change. This is partly because of the increase in the stock price too.
Either way, it still looked a bit overpriced but considering its future potential, that could be the explanation why and hence people still invest in it despite the price.
Its P/FFO is about 26.76. Although overvalued, it has decreased by a little bit. With the same reasoning, that probably explains why the ratio is so.
Looking at its debt profile, it has gearing ratio of 35.8% which looks alright. Keppel DC REIT would still have plenty of room to run. Additionally, it has an interest coverage ratio (ICR) of 5.1 times which is really good. It has also improved from the last analysis.
Looking at its debt maturity profile, it is still about the same, and the years to take a look at is 2026 and subsequently 2027. As investors, we have to see the refinancing results as I believe the management should be doing so. I means, that’s about 2-3 years away which is pretty near term.
Keppel DC REIT also has cost of debt of 3.5%, which is still alright.
What about its income source? It has a portfolio occupancy rate of 97.5%! Even though it has decreased by a little bit, it is still an excellent rate! Its weighted average lease expiry (WALE) is about 6.4 years, which is good too (albeit has decreased by a bit as well after my initial analysis). After the Tokyo data center acquisition, these should be better.
Keppel DC also still holds, for its geographical diversification. Here they are together with how many data centers each one has:
- Singapore with 6 data centers
- Australia with 1 (note)
- China with 3 data centers
- Malaysia with 1 data center
- Japan with 1 data center
- Germany with 2 data centers
- Ireland with 2 data centers
- Italy with 1 data center
- The Netherlands with 3 data centers
- UK with 3 data centers
It is understandable that Singapore would have more considering Singapore’s status. Japan is also an exciting addition. With this, naturally Singapore would have the highest gross revenue as compared to the rest. Overall, there is no issue with the diversification, but the concentration would require extra attention.
Looking at its tenant diversification, it is also understandable considering how this world is currently swamped by the hype in technology.
Considering the nature of a data center, we probably just have to monitor on how the managers can retain or bring in better clients to improve its DPU.
Looking at its growth in AUM, frankly I don’t expect it to keep on increasing at an exponential rate unless the current economic situation got better. All in all, it still looks alright.
Before I end this analysis, I just want to point out the few risks that I think may affect Keppel DC REIT to a good extent:
- Interest rate risk
- High rate, trouble for it
- Liquidity risk
- If it had to go through liquidation for whatever reason, this is a problem considering all the assets are properties mostly
- Currency risk
- I would say when other currencies are weaker than SGD, this can affect
- Operational risk
- How can the managers manage the properties, clients, as well as businesses
- Competition risk
- How can the managers retain the current good clients
- Cybersecurity risk
- With how technology becoming more and more natural, more and more hackers are coming up to threatens companies and what’s valuable is data. This means, data centers can be vulnerable
With that in mind, let’s see when is the distribution:
- Ex-distribution date: 2 August 2024
- Record date: 5 August 2024
- Payment date: 23 September 2024
Wrap Up
Looking at its latest report that compares HoH and YoY, I have to say, based on the figures, Keppel DC REIT still can be a promising data center REIT. Hence, considering all the potentials, I would say it all boils down to the managers.
With that, that’s all for this analysis. If there is anything that I missed, feel free to give any constructive feedback in the comment section down below. Do remember this is by no means an advice to buy or sell. This is just an unprofessional piece of analysis by unprofessional me in the form of opinions. However, feel free to share to other people if you find this useful in any way.
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