Maybank initiates ‘buy’ call on Keppel DC Reit amid demand for AI adoption, cloud migration

[SINGAPORE] Maybank Securities analyst Krishna Guha on Thursday (Jul 17) initiated a “buy” rating on Keppel DC Reit, with a target price of S$2.40, considering that it would benefit from demand tailwinds arising from digitalisation, cloud migration and the adoption of artificial intelligence (AI).

The analyst believes that data centres are poised to benefit from growth in data generation and consumption, enterprise cloud adoption, AI usage and evolving standards for cybersecurity and data protection.

Citing DC Byte forecasts, he said that a compound annual growth rate (CAGR) in demand in the high teens – between 17 and 19 per cent – is expected for global data centres from 2024 to 2028. “Keppel DC Reit’s footprint geographies of Europe and Asia are also expected to show a similar growth trajectory.”

As at end-2024, the Asia-Pacific pure-play data centre Reit had 24 data centres in 10 countries, and assets under management of around S$5 billion. Its portfolio includes data centres in Singapore, Europe, China, Australia and Japan, with the assets enjoying occupancy of more than 96 per cent.

Guha wrote in his report that the Reit has demonstrated resilient and growing distributable income, supported by strong rental reversions of up to 39 per cent in FY2024. It has also made strategic acquisitions and managed its portfolio actively, delivering a 0.7 per cent growth in distribution per unit in FY2024 and 14.2 per cent increase in the first quarter of 2025.

A total of three pure-play data centre Reits are listed on the Singapore Exchange (SGX). NTT DC Reit is the latest data centre S-Reit on SGX, with its initial public offering market capitalisation at US$1 billion. It began trading on the local bourse on Jul 14.

Keppel DC Reit remains financially prudent, with a gearing at 30.2 per cent, interest coverage of 5.8 times, and around S$886 million debt headroom for growth.

That said, supply, especially in Europe, is constrained due to power and land availability, noted the analyst.

“Our TMT analyst Hussaini Saifee has a positive view on Asean data centres on the back of a multi-year growth cycle. We forecast a 2024-2027E distribution per unit (DPU) CAGR of 4.9 per cent, driven by rent escalation and mergers and acquisitions.”

Keppel DC Reit, Asia’s first pure-play data centre Reit, was listed in 2014. It was also re-included in the STI on Jun 23, raising the number of S-Reits in the index to eight. 

Keppel DC Reit’s sponsor is Keppel DC Investment Holdings, a wholly owned entity of Keppel. Keppel has been designing, building and managing data centres and related digital infrastructure, including telecom, submarine cables and power, for over 10 years.

The group has 650 megawatts (MW) of gross IT capacity and is scaling it up to 1.2 gigawatts (GW). It is also exploring innovative concepts such as 1GW near-shore net-zero data centres.

Guha wrote: “As such, the Reit has growth opportunities, which is further enabled by its low gearing and an attractive cost of equity of around 4.3 per cent yield.”

Some downsides factored in by the Maybank analyst include higher electricity and carbon costs and stricter climate regulations, which could increase operating expenses and capex requirements. Other risks include prolonged high interest rates, and foreign exchange rate volatility.

Keppel DC Reit trades at a 1.4 times price-to-book value, with a yield spread of 230 basis points (bps), compared to its historical mean of 278 bps.

“While the spread is low, we believe past record and strong data centre dynamics justifies the same, in our view,” the analyst emphasised.