Impressive Track Record – Keppel DC Reit !

A fellow member in our telegram group asked: “For Keppel DC Reit, I bought some (at) $2.55 and my average price went up. Actually would averaging up make sense?”

This question came as we were discussing about the merits nof averaging down Keppel DC Reit if its price share would come down further.

Instinctively, I replied “I don’t see anything wrong as long as you are happy with the dividend yield (and/)or if you believe in the growth story of the company which will lead to capital appreciation. I do regular investment on my ETFs and unit trusts (for my index portfolio as many of you know). For individual stocks, I tend to look for pullbacks. (This is because) individual stocks tend to be (more easier) subjected to “irrational behaviour” or herd mentality to sell despite good underlaying value”

This was a short answer. But after replying, I thought to do proper justice to the topic, I would do a blog on Keppel DC Reit (KDCR). This is especially so since I had done some research on it recently, after doing the same for AA reit.

Verdict: Keppel DC Reit is a Great Company !

If you look at the track record of KDCR, you can’t help but be impressed with its performance over the years. This is especially for me as the contrast with AA Reit cannot be more stark. KDCR beats AA Reits hand down and in my views, many times over. It shows up in the following:

  1. DPU increases EVERY YEAR since listing
  2. NAV has also increased EVERY YEAR since listing
  3. Number of Data Centre increases at a steady rate EVERY YEAR. With a strong sponsor, its growth story is very credible
  4. It has access to low cost funding and getting better EVERY YEAR

Keppel DC Reit seems to be building a support at current level – see graph below.

In my view, if a person is a long term investor, he/she can start accumulating at current level.

More technical details as follows if you are interested …

If you have time and/or are interested, I welcome to read on for a more detailed analysis. Let’s start by taking a closer look at some of KDCR’s business fundamentals and performance: (all data is obtained or derived from its annual reports)

#1 DPU increases EVERY YEAR since listing

From 2016 to 2020, DPU increased from 6.14 to 7.32 cents in 2018 and then to 9.17 cents in 2020. That is an average compounded annual growth rate of 8%. It experienced the highest growth rate of 20% in 2020. If this 20% is “driven” by COVID, then we may see a strong growth in 2021 too. Even if it just increases by 8%, DPU would increase to 9.9 cents.

If you have followed the mid-year results presentation, you would know that KDCR recorded 4.924 cents for 1H DPU. Assuming that 2H DPU is the same, then full year DPU of 9.848 cents. which is close to the historical average of 8% growth. Hence, the growth trend of KDCR remains intact for 2021.

Not doubt, this year looks like a slower one than 20% recorded in 2020. But that fact was also reflected in the share price which went down from the peak of $3.04 in Aug-Oct 2020 to the current $2.55. At that peak price, it commanded a PE ratio of 29 (2020 EPS), now the PE ratio is 24 (2021 EPS est.).

Relative to past years, 24 is still a high PE but the COVID situation has made the data centres more attractive and comparatively a more resilient business compared to others. Hence, investors may just be more willing to pay a premium to invest in KDCR.

#2 NAV has also increased EVERY YEAR since listing

From 2016 to 2020, NAV increased from $0.95 to $1.07 in 2018 and $1.19 in 2020. This is a good trend especially when it is coupled with rising DPU. A higher NAV means that their properties are now more valuable than before. If mid year result was any indication, 2021 NAV would be likely to increase to $1.21 – keeping up the trend. Well done !

#3 Number of Data Centre increases at a steady rate EVERY YEAR. With a strong sponsor, its growth story is very credible

It is interesting to see that KDCR has consistently added 2 data centres every year.

In 2016, it had 11. In 2018, it was 15, 2019, 17 and 2020, 19. In 2021, it would have added at least 1 more.

In July, they announced the acquisition of Guangdong Data Centre. This is their first acquisition of a data centre in China, further diversifying their geographical exposure from predominantly Singapore and Europe. This facility is the first of six data centre buildings to be completed in the Blue Sea Intelligence Valley Mega Data Centre Campus. Under the agreement, KDCR will have the right of first refusal (ROFR) to acquire the other five data centres within the campus, which is currently being fitted out. Isn’t that nice?

The strength of KDCR is not only in its ability to acquire and manage data centre well, but also in having support of a strong sponsor – Keppel T&T, which holds 70% equity stakes in Keppel Data Centres. The other 30% is held by Keppel Land.

Keppel Data Centres has 26 data centres globally. And there is no prize for deducing that KDCR would have the first right of refusal to all these 26. Hence, KDCR’s growth story is very credible.

In fact, I feel that KDCR can probably grow faster if it wants. However, it is taking a more measured pace for growth, making sure that whatever asset they have acquired, they would assimilate carefully and successfully into their organisation before going for the next one. I think this is good for long term investors.

#4 It has access to low cost funding and getting better EVERY YEAR

In going through the annual reports, I also found that KDCR has access to low cost funding, i.e. <2.0% and is doing this better and better each year.

In 2016, its cost of fund was 2.3%, in 2018, it was 1.9% and in 2020, it was an impressive 1.6%. In 2021. according to the mid year review, the company reported that their cost of debt is further lowered to 1.5%.

The cost of fund is very important to a Reit as its business model requires it to take on a substantial amount of debts to fund their acquisition and growth and return cash to investors.

Assuming everything constant, by not needing to pay $1 of interest, means that that $1 can be distributed to shareholders as dividends or to fund growth. In comparison, AA reit cost of debt is between 3.0-3.5% over the years. Out of a debt of $1.165 Bln, a 2% lower in interest rate means a saving of $23.3 Mln, ~ 15% of KDCR full year dividend distribution.

KDCR leverage ratio is currently 36.7%. Assuming that it is willing to go to 40%, it would have sufficient debt headroom to acquire another data centre without needing to do a rights issue and ask its shareholders to cough out money to fund it. Not that a rights issue is bad by nature but for shareholders who are not cash rich, it can be a major consideration.

Hence, on an overall basis, I think Keppel DC Reit is a great company to stay invested for the long term.

The question now is whether we should buy at current price of $2.55

This is a difficult question to answer.

There are various techniques that different people used to determine whether to buy or sell at a particular price. I would share a few approaches that I use personally to answer such a question.

First stop, let’s ask the “experts” – the analysts covering KDCR.

The picture below is a summary of analysts’ target price for KDCR provided by SGinvestors.io. As you can see 3 out of 4 analysts have a BUY recommendation and their assessments were done as recent as July 2021, so you can consider them to be up-to-date. The average target price from these 3 BUYs is $3.08, which is 20% above current price.

DBS research was the only one with a HOLD rating but it was last assessed in April which may be outdated. Even then, its target price is $2.80, which is still about 10% above current price.

Hence, buying at current price seems pretty safe accordingly to the experts.

But as many of you know, analysts can be overly optimistic or pessimistic. Furthermore, their views can change overnight. It is good to have them as reference but we should do our own homework.

Second Stop, let’s look at historical price.

I must confess that I don’t know much about technical chart analysis. However, from what I can see as a layman, it seems that KDCR share price has dropped close to 20% over the last one year and appears to be building some support at the current price level.

The 50 days average curve (pink line) seems to be flattening out too. It could mean that further downside risk is limited.

This image has an empty alt attribute; its file name is image-1.png

Typically, I look for this particular point – i.e. 20% below peak before I consider a major accumulation of the stock. This is also assuming that there are no major market factors or company issues that would adversely affect the share price.

As mentioned before, for KDCR, the peak was about $3.04, so, 20% down is about $2.40 – not too far away from the current price level.

Hence, in my view, we can consider accumulating KDCR in small and regular quantity now. However, do keep some cash for any black swan opportunity that could cause KDCR share price to drop drastically. That would be a good buy opportunity. Don’t be surprised, such event can happen for no real reason. We just need to have the patience to wait. As Warren Buffett once said, “The stock market is a device for transferring money from the impatient to the patient.”

Third stop, reversion to mean in terms of yields – which I think is a relevant consideration given that KDCR is still afterall a REIT

In the last 3 years, KDCR’s yield hovers between 3.0% to 5.6%, with an average around 4.6%.

I see dividend yield as a demand level by Reit investors to hold the stock.

If the yield is high, rational investors would buy and push up the price until the yield drop to an “equilibrium” level and then they would stop. The reverse is also true, if yield is too low, then it may be worthwhile for rational investors to sell if there are better investment opportunities elsewhere.

So if we base our buy price on an expected DPU of about 9.848 cents this year and target the average yield at 4.6% , assuming that to be the level demanded by most investors, then KDCR share price will move down over time towards $2.14.

If you take this belief, then you may want to wait or hold on to bulk of your cash and only enter in a big way from $2.14 and below.

My Personal View

All these analysis aside, I like to re-share my view that KDCR is a great company to own.

If you are happy with the current yield of 3.86%, which is actually quite decent, then no harm getting a small holding of KDCR. And over time, just accumulate KDCR periodically. And whenever the share price drops significantly for no real reason, then it is a good time to jump in and get more. If the share price shoots up unexpectedly, then you may want to take profit off the table but please do not chase the share price. I am not a believer of “Buy HIGH and Sell HIGHER”. And even if the share price doesn’t move much, then just buy regularly and sit back and enjoy the 3.86% yield.

I hope you find the above sharing of my thoughts useful.

I would be happy to receive your comments and feedback, especially if you have a different view. It will help to shine a torch on my blind spot and sharpen my analysis.

Have a great investment week ahead.

Regards,

Warriortan

3 thoughts on “Impressive Track Record – Keppel DC Reit !

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