Brokers' Call: Keppel DC Reit

M1 has been building a fixed broadband and enterprise segment franchise, but a painful transition period is forecast.
M1 has been building a fixed broadband and enterprise segment franchise, but a painful transition period is forecast.ST FILE PHOTO

KEPPEL DC REIT

Broker: DBS Group Research

Call: Buy

Target price: $1.44

Keppel DC Reit will acquire Dataplex, its second co-location data centre in Dublin, Ireland, at an agreed value of €66 million (S$106 million).

The acquired asset, which started operations in 2013, has 25,200 sq ft of net leasable area, and is located at unit B10 of the Ballycoolin Business and Technology Park in Dublin, about 12km from the city centre.

Assets under management have increased to about $1.53 billion with aggregate net leasable area of 917,240 sq ft across 13 data centres, excluding the mainCubes data centre, after the acquisition.

The net property income yield of the new asset is estimated to be 7.5 per cent and contributions to be immediately accretive to distribution per unit (DPU) - projected to be lifted by 5.5 per cent to 7.72 cents in financial year 2018.

The acquisition will be 100 per cent funded by debt.

After the committed purchase of mainCubes, in Main, Germany, next year upon its legal completion, aggregate leverage is expected to surpass 40 per cent.

Future acquisitions are likely to tap equity fund-raising, which implies potential DPU dilution.


M1

Broker: Maybank Kim Eng

Call: Sell

Target price: $1.59

M1 is the most exposed to Singapore wireless competition risk.

M1's management has been building a fixed broadband and enterprise segment franchise, but nonetheless a painful transition period is forecast.

Share price has derated but there is reason to believe there is still a downside from here. A healthy balance sheet will support payout, partially through debt, offsetting returns risk temporarily.

M1 and the incumbents are likely to use the upcoming release of new smartphones to accelerate recontracting post-paid subscribers to two-year contracts. This will come at the cost of unprecedented, elevated subsidies and depressed profits for the next two years.

M1's wireless service revenues may decline at only a 1 per cent, three-year compound annual growth rate (CAGR) due to the industry- wide defensive manoeuvre. Fixed network revenues led by fibre broadband and enterprise services will grow at a 13 per cent, three-year CAGR as management focuses on building scale and relationships to tap growth opportunities in the face of wireless sector risks.

A version of this article appeared in the print edition of The Straits Times on September 18, 2017, with the headline 'Brokers' Call'. Print Edition | Subscribe