The Upcoming Acquisition of New Data Centres for Keppel DC REIT Are Not As Rosy As What Many Believes-Part 2 of 2.

Hi Folks, in my previous post on why things are not so rosy as it seems with Keppel DC, I have mentioned why I think that KDC is overpriced even with a 4.43% distribution yield even after the major acquisitions of 2 data centres at Genting Lane from its sponsor. Interestingly, I think that investors is viewing KDC as a “mini” growth stock rather than a REIT. The belief in more of such future acquisitions might be the only plausible explanation on the market premium over its net book value and current super low distribution yield.

Anyway, for those retail investors who are interested in the preferential offer, please take note of the below key dates so that you don’t miss it:

Pricing has been set at S$2.03 per unit. Every existing retail investor will be entitled to 86 new units for every 1,000 units held.

Parting Thoughts

Since the market trading price as at 29 November 2024 (Friday) is still at a strong S$2.220 per unit and the preferential offering is at S$2.03 per unit, there is approximately 10% profit for those who managed to find ways to oversubscribe & gets allotted extra units. Selling these extra units off on 18th December 2024 will then become a tidy profit within a short 2 weeks trade, assuming that the market price remains strong at current level. Of course, if price were to tank after the preferential offerings, then one has to eat grass. :)

The Upcoming Acquisition of New Data Centres for Keppel DC REIT Are Not As Rosy As What Many Believes-Part 1 of 2.

The top news for the past week, which many SREITs investors are super excited about, seems to be the acquisition of the Genting Lane Data Centres by Keppel DC REIT (“KDC”) from its Sponsor Keppel Ltd. Many analysts and also postings on social media by bloggers & YouTubers have been singing high praises over the upcoming acquisition and the associated equity fund raising of over S$1 billion in capital. The private tranche has over 3.4 times of oversubscription and I believe that the upcoming preferential offerings for retail unit-holders will be also as hot and crazy. While I think that this deal is sensible, nevertheless, I thought that it is not exactly a fantastic one and there are some key risks here that some investors seemed to have closed one eye given the hype over  Generative AI and the usual strange belief that KDC can grow its distribution per unit indefinitely with many more such "upcoming fantastic acquisitions".

Things are not exactly rosy at KDC

Well, I don’t want to be a wet blanket here. I mean I am also a former firm believer that the data centre leasing business has resilient demand with tenants that will not be migrating upon expiry due to the significant challenges in moving all the data servers and that the current Tech focused world means that this is the latest hot cake that will be growing exponentially to cater to the insatiable market demand-look at the mind whopping double digit  rental reversion that the Data Centres are charging their tenants upon lease renewal-KDC announced during their half year results that they have renewed a major tenant for +40% rental reversion. The prospective new leases at Genting Lane Data Centres are also asserted to be up to 10% to 20% lower than the prevailing market rate which implied more potential upsides upon their current lease tenant contract expiry. 

However, folks seemed to have forgotten about (i) KDC trouble at Guangdong DC and (ii) also that its current distribution to unit-holders are on artificial life support with S$13.2Mil none-recurring distribution from the DXC settlement that the management has cleverly spread over the 1st half and 2nd half of FY2024 respectively to avoid a significant tapering off in distributions to unit-holders. (iii) In addition, the new acquisition is not a free-hold building. The ownership is only for 15 years or 25 years if the extension option is being exercised and paid for. I call these the 3 key risks of holding on to KDC which I should elaborate on further:

(i) KDC trouble at Guangdong DC

I have not heard updates from any reports that the Guangdong DC losses have been plugged. I recalled vividly that Keppel DC is still unable to collect any rental income from this DC. This is extremely bad news. We need to be surgical here. The 1st half DPU from KDC is only 4.549 cents. Normalizing this, the projected DPU for FY2024 hovers around 9.098 cents or S$0.09098 per unit. Taking into account its current  market price of S$2.220 as at 22 November 2024, this implied an absurdly low distribution yield of 4.1%. 

(ii) There is S$13.2Mil of DXC settlement that has been spread over the 2 halfs of FY2024

What this means is that if not for this DXC non-recurring settlement fees, the DPU for KDC will drop even lower than the already rock bottom 4.1%. Even with the recent upcoming acquisition of the Genting Lane DC which proclaims to be DPU accretive of up to +8.1% , the new projected DPU will be at a yield of 4.43%. Bear in mind that we are no longer in a zero or extreme low interest rate environment anymore unlike the last decade. 

Also, this deal is being structured such that only 49% of the control of the new data centres falls under phase 1 in December 2024 while the remaining 51% will only complete in 2nd half of FY2025 (next year) so the effect of the increase of the +8.1% will not be immediate. So, this means that the yield is unfortunately still not very attractive for myself. I am expecting a yield of at least 5.5% to 6% for holding on to KDC. 

(iii) Very short lease tenure of 15 years or 25 years (if extension option taken) for this latest significant acquisition.

Given that this deal is valued at S$1.3 Billion, this will bring the Assets Under Management ("AUM") to S$5.2 Billion. 25% of AUM of KDC will thus be under the very short tenure of 25 years which is the norm for industrial property in Singapore. What this means is that the assets value will plunge to zero and unit-holders will need to be ready for another equity fund raising to extend the tenure from government agency JTC. This brings us back again to my point that 4.43% distribution yield is extremely low as unit-holders need to prepare to plough back capital into KDC at the end of 25 years. Keppel Infrastructure also have this issue with their concessionary assets under management but at least their dividend yield of approximately 7%-8% will cover part of the capital recycling cost to unit-holders. 

Summary of Part 1 of 2

Note that above are just my personal thoughts guiding myself on whether I should be subscribing for this KDC preferential offerings. You folks may have a totally different and optimistic view and that is fine. So don’t roast me for this post.  

In view of the above, I think I will only be subscribing to the bare minimum based on the allotment ratio and some extra to round up the numbers. I think that there is still a possibility that the market price of KDC may decline further. 

Investment Is Just Like Playing Tennis！

Hi Folks, good day to all! For the past few days while surfing the internet and social media, I kept seeing Ads with Adam Khoo playing tennis popping out. Basically, one cannot anyhow whack the tennis ball back just like investing per Adam Khoo. From motivational speaker to investment guru, wow, Adam Khoo is now everywhere selling investment courses!

I can’t help but wonder whether Adam Khoo is making more money from his personal investment picks or selling courses? Anybody attended his investment course before?

SREITS Crashed Again- REITS Or SG Banks More Attractive?

SREIT tumbled down again over the past 2 weeks. Interestingly, I see a number of folks like Josh Tan buying into Mapletree Industrial Trust (“MIT”) or Master Leong strong preference for Mapletree PanAsia Commercial Trust (“MPACT”) to take advantage of the recent “crash” while others like the famous AK71 preferred the local trio of DBS, OCBC and UOB banking stocks as better buy than REITs. For the latter, the local banks are only paying out 50%-60% of their earnings as dividends to shareholders while ploughing back 40%-50% of their earnings into the business which should theoretically keep building up their Net Assets Value and eventually their market price should gradually increase. So it gets kinda of confusing on whether one should buy more REITs during the current downturn for the REITS sector or accumulate more local SG bank stocks given the different opinions of their preferences. 

1. Time to Chiong/Accumulate more SREITs while prices crash and interest rate being slashed gradually into 2025?

Personally, I have mentioned before my thoughts in September 2024 that most of our SREITs are now priced fairly given that we should not expect future interest rate to be near the previous decade of zero interest rate environment. Distribution yield of 5.5% to 6.0% for blue-chips SREITs should be the norm now. Anything that is lower will not compensate for the additional risk premium one undertakes relative to the local risk-free rate. 

MIT’s distribution yield of 5.96% at unit price of  S$2.27 per unit is decent. But I would not say super attractive given that its market value per unit is at a huge premium over its NTA per unit. Since MIT is my second largest holdings already, I did not add on any further.

As for MPACT, while its distribution yield is now at an attractive 6.9% (@ S$1.23 per unit) and its market value per unit is at a large discount over its NTA per unit, the stock market maybe pricing in substantial worsening in distributions from its Hong Kong, China and Japan exposure. Also, its crown jewel of Mapletree Business City seems to be losing its luster. So I guess the usual high risk high reward adage will apply here. It thus depends on which crystal ball you are gleaning into for whether the foray here will reap handsome return or just a lackluster one.

2. Local Banks With Splendid Results Expected Into 2025.

There is no doubt that DBS, UOB and OCBC trio have been having a good run since last year due to the sudden spike in interest rate on their net interest margin and also wealth management business. But if recession comes, bank stocks will also crash and risk of bad debts increase exponentially. I will be staying away from banks for now unless there is a substantial correction in their prices. 

Parting Thoughts and My Watchlist.

Given the recent developments as aforesaid mentioned, I have been focusing my monthly nibble size investments into Endowus bond funds and Keppel Ltd. I thought that overseas REIT such as Link REIT looks more attractive given its market price is almost 40% off its net book value per unit and giving a distribution yield of 7.6% with 21% leverage ratio.

 

CPF Special Account Shielding Strategy Still Working Meh?

Interestingly, I came across a CPF Special Account ("SA") shielding post by Kilde while browsing on SG Investment Blogger. It was published in June 24, 2024 but updated in August 20, 2024. 

But I thought that Mr Lawrence Wong had already plugged the loophole earlier during budget 2024 and it was published on March 22, 2024 on the CPF Board website that the CPF Special Account for those who attained the age of 55 will be closed with effect from 2025 after the Retirement Account is setup. 

Source : CPF Board- 22 March 2024

Strange that Kilde folks are still promoting the SA shielding strategy wor. Or am I missing things out that there is another new loophole?

Keppel Ltd Heavily Leveraged And Un-investable?

Keppel Ltd’s share price has pulled back from its recent high of S$6.65 in early October 2024 to the recent S$6.40 per share. It’s yearly dividends (excluding special dividends or in specie dividends) is around 33 cents to 34 cents. Hence normalised dividend yield is at around 5.3% based on its current share price of S$6.40 per share. I thought that it is a good time to accumulate more of Keppel Ltd after the recent pull-back.

The Concerns of High Debt to Equity Ratio of 0.9 Times.

Interestingly, there were some skeptics who have condemned Keppel as un-investable and unstable due to its substantial borrowings. The high gearing is due mainly to Keppel’s investment properties and property development segment as well as the infrastructure division. Nevertheless, below are 3 reasons why I would personally still invest into Keppel Ltd. 

1. Shift in Business Model To Focus More on Recurring Income Instead of Capital Intensive Business 

The building up of recurring income is on the right trajectory. As seen below, the recurring operating income now forms a substantial part of Keppel’s income streams-asset management and operating activities (sales of gas, electricity, telecommunication services etc amounted to S$773Mil in 2023. This is a 54% increase relative to 2022 and makes up 88% of net profit for 2023. Keppel’s strategic shift to focus on recurring income and monetisation programme will also release more funds for investments and debt repayment. 

 

2. Keppel Is Retaininig More Than 30%-40% of Its Earnings For Growth

Keppel is only paying out about 60%-70% of its earnings per share as dividends to shareholders and retaining the rest for its existing businesses. For 2023, It has a diluted EPS of 49.1 cents and paying out only 34 cents as dividends. 

3. Prize Jewel in Data Centres Development and Management.

Keppel has recently announced that it intends to expand its current DC capacity from 650MW to 1.2GW in the near term with an additional S$10billion funds under management growth. This will take 3-5 years as these DCs will be built from scratch at selected sites.

The DC at Genting Lane is a good illustrative example. After the development of the DC, they will monetize it by selling to Keppel DC REIT. After selling it off, Keppel will still make recurring income from the management of this investment property as Manager and also rental income from its ownership in Keppel DC REIT.

Parting Thoughts

Last but not least, Temasek Holdings holds more than 20% stake in Keppel Ltd. In the event of a full-blown financial crisis, Keppel Ltd will be able to tap on the financial might of its substantial shareholder as its final life line to avoid a fire-sales at the worst possible time. I have recently sold off S$20K of my Keppel DC REIT after its strong recovery from its record low in the past 2 years which resulted in its distribution yield dropping to only a mere 3.9% with 90%+ payout and reinvested the proceeds into Keppel Ltd.