SGX-listed Keppel DC REIT (SG:AJBU) is under pressure as growing concerns about uncollected rents are weighing on its shares. AJBU shares declined 2.2% on Monday, following a downgrade by CGS-CIMB to Hold from Buy. The downgrade follows the company’s announcement in mid-December that Guangdong Bluesea Data Development Co (Bluesea), which is the master lessee of three data centres, failed to pay rent for 5.5 months.
Consequently, Keppel DC REIT issued a letter of demand to Bluesea to recover 48.3 million yuan of pending rentals and related expenses.
Keppel DC REIT owns a diversified portfolio of income-producing real estate assets in Asia, primarily used as data centres.
Keppel DC REIT in Trouble
CGS-CIMB analyst Lock Mun Yee turned bearish on Keppel DC REIT shares and lowered the price target to S$1.88 from S$2.53, as he sees a higher possibility of tenant Bluesea defaulting. Moreover, he lowered the profit estimates for FY24 to FY26, assuming no rent from Bluesea, currency headwinds, and a higher cost of debt.
Likewise, DBS analyst Dale Lai lowered the price target for AJBU stock to S$2.20 from S$2.45 on Monday, citing the absence of rental contributions from Bluesea in FY24. Reacting to the second-half and full-year results announced last week, the analyst noted that the REIT’s net property income (NPI) declined 3% in FY23 due to provisions associated with uncollected rents from the Guangdong data centres.
The analyst cautioned that the absence of rental income from all three Guangdong data centres could drag down the FY24 distribution per unit (DPU) estimate by 15% to 16%. He also highlighted that the company prefers a “collaborative but firm approach” in its talks with Bluesea and is avoiding litigation.
Lai reiterated a Buy rating on AJBU stock and believes that despite the expiry of certain leases in FY24 and FY25, there is “potential for positive rental reversions,” given the current upward momentum in rents.
Is Keppel DC REIT a Good Stock to Buy?
Keppel DC REIT shares have declined nearly 18% over the past year. Overall, analysts are sidelined on AJBU stock due to the uncertainty associated with Guangdong data centres. The Keppel DC REIT share price target of S$2.13 implies 21% upside potential.
Note that the Hold consensus rating and price target do not take into account today’s rating/price target changes.
