SINGAPORE (Dec 6): UOB Kay Hian is maintaining its "buy” call on Keppel T&T with a target price of S$2.53, citing snowballing profit and an earnings boost from its maiden acquisition in Frankfurt.
Lead analyst Edison Chen notes that the Alpha DC Fund’s acquisition of a data centre in Frankfurt came with 50% occupancy, serving as an example of how the fund bolsters Keppel T&T’s ability to acquire income-generating assets while minimizing greenfield asset risks.
The acquisition has added a 7% (S$3.9 million) boost to Keppel T&T earnings at 50% utilisation, notes Chen, who believes the number will rise to S$5.9 million at full utilisation. In addition, the company would also be able to charge development fees for the project, reaping additional fees on top of the acquisition.
“This is a fixed percentage of fund management remuneration payable to Alpha by Alpha DC Fund during the duration of the sub-advisory services agreement,” says Chen.
Keppel T&T‘s divestment of T27 to Keppel DC REIT continues to provide recurrent earnings for Keppel T&T, notes Chen. The company is now able to share rental income through its 30% stake in DC REIT and also earn additional recurring income through other services.
“Not apparent from the T27 divestment, was the additional fees that Keppel T&T can charge directly to clients on power, physical, cyber security services and any other future services/upgrades,” says Chen.
“This is because Keppel T&T ultimately owns the client relationships which is crucial in our opinion, while DC REIT act mainly as a landlord without much technical expertise,” he adds.
This arrangement also allows Keppel T&T to recycle its capital for its development business, notes Chen, which yields higher returns. Data centre projects deliver superior returns despite their small absolute amount, adds the analyst.
“We understand that the un-levered IRR of each data centre project is roughly 13% to 14%, expanding to over 18% on a levered basis,” says Chen.
“A study by Alpha Investment Partners in 2014 showed that EBITDA margins for wholesale co-location providers (excluding cost of power, which is pass through anyway) to be 60% to 70%,” he adds.
Shares of Keppel T&T traded up 4 Singaporean cents at S$1.72 as of 10.49 am.