Dear Smart Investor,
Thank you for voting for our first stock poll for the battle of the stocks.
The first round featured two winning stocks last year amid a pandemic — Keppel DC REIT (SGX: AJBU) and Sheng Siong Group Ltd (SGX: OV8).
The question for the duo, of course, is whether their good fortune in 2020 can carry on into 2021 and beyond.
After an intensive round of voting, Keppel DC REIT has emerged as the winner!
The data centre REIT owns 19 data centres spread across eight countries as of 31 March 2021.
Assets under management stood at US$3 billion.
Keppel DC REIT’s sponsor is Keppel Telecommunication & Transportation Ltd (Keppel T&T), a wholly-owned subsidiary of Keppel Corporation Limited (SGX: BN4), a blue-chip conglomerate with interests in offshore and marine and real estate.
The REIT’s manager is Keppel DC REIT Management Pte Ltd, which is 50% held by Keppel T&T and 50% held by Keppel Capital, the asset management arm of Keppel Corporation Limited.
The presence of a strong sponsor is just one of the reasons why the REIT has emerged unscathed throughout the pandemic.
Let’s take a look at a few other attractive aspects of the REIT.
A mark of resilience
As lockdowns and border closures swept across the world early last year, Keppel DC REIT’s business remained unaffected as data centres were deemed essential services.
The lack of physical interactions meant that numerous people and businesses were compelled to shift online, thus boosting demand for data usage.
The numbers are stunning — according to a CB Richard Ellis report (March 2021), global internet traffic surged by 47% year on year in 2020, significantly higher than the initial 28% forecast.
Along with the surge in traffic, demand for Keppel DC REIT’s data centres remained resilient, thereby boosting the REIT’s attractiveness.
Throughout the pandemic, enterprise spending on cloud infrastructure grew more than 30% year on year last year.
And according to Danseb Consulting, this level of spending is expected to grow by more than 20% per annum through 2025 as more organisations migrate to the cloud.
Sturdy fundamentals
With a combination of acquisitions and asset management initiatives (AEI), Keppel DC REIT reported a strong showing last year.
Gross revenue rose 36.3% year on year to S$265.6 million while net property income (NPI) rose 37.7% year on year.
Distribution per unit (DPU) increased by a healthy 20.5% year on year to S$0.0917.
The momentum has carried through to the REIT’s fiscal 2021 first quarter (1Q2021), too.
Gross revenue for 1Q2021 climbed 10.6% year on year while NPI increased by 10% year on year to S$61 million.
DPU jumped by 18.1% year on year to S$0.02462. Annualising this DPU gives S$0.09848, with the REIT’s units yielding around 3.8% at the current price of S$2.58.
Aggregate leverage stood at 37.2% as of 31 March 2021, below the Monetary Authority of Singapore’s raised threshold of 50% for REITs.
And with its low cost of debt of just 1.5% and high interest coverage of 13.1 times, there is a fair bit of room for the REIT to gear up for yield-accretive acquisitions.
Significant future potential
The future looks bright for Keppel DC REIT.
The development of a new data centre — Intellicentre 3 East Data Centre, is progressing as planned with development completion expected in the second quarter of 2021.
The REIT is also progressing well with its AEI for DC1 and Keppel DC Dublin 2.
The former has completed its fit-out works and has been leased to 1-Net Singapore, while the latter has added a new data hall that has been committed by an existing client.
The pre-committed demand is a good sign.
In April this year, the REIT also expanded its investment mandate into real estate and assets in the digital connectivity sector.
At the same time, a non-binding term sheet was also signed with M1, a telecommunication company, to invest around S$87 million in M1’s current mobile, fixed and fibre assets.
Meanwhile, the REIT is coasting on strong tailwinds that should see it post multi-year growth in DPU.
With COVID-19 spurring digital transformations for a wide swath of businesses, end-user spending on public cloud services is projected to grow at 17.8% per annum up till 2022.
Global hyperscale data centre operators are also ramping up capital expenditure to meet growing demand, opening up opportunities for the REIT to invest in some of these assets or partner with the major players.
Get Smart: An exemplary REIT
Keppel DC REIT is a prime example of a REIT that is both managed well and displays strong growth tailwinds.
AEI has been well-executed over the years, contributing to healthy organic DPU growth.
Opportunistic acquisitions have also increased the REIT’s asset base and lent a further boost to DPU.
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Disclaimer: Royston Yang owns shares of Keppel DC REIT.
