As of 19 June 2023, Keppel DC REIT(KDCR) has been replaced by Seatrium, in the Straits Times Index (STI), just after less than three years since it was added to the STI.
Although Seatrium (formerly Sembcorp Marine) was one of the 5 stocks on the reserve list, this was relatively unexpected as Keppel DC REIT did not meet the exclusion criteria.
In addition, news that Seatrium has been included in the STI came just a day after Corrupt Practices Investigation Bureau (CPIB) announced an investigation on the company for alleged corruption in Brazil.
Companies gain entry to the index – which is reviewed every quarter – if they rank 20th or higher among eligible securities by full market capitalisation. Companies are removed from the list if they rank 41st or lower.
Calculations showed Seatrium fell within the top 20 counters on the index based on its S$8.5 billion market capitalisation. Keppel DC Reit is in 35th position, which does not meet the 41-or-below criterion for it to be booted from the index.
How will the exclusion affect Keppel DC REIT?
The main benefits of being included in any index is visibility and investments from institutions. Institutional investors tend to deploy their funds in the better known stocks. Funds and Indices that seek to mimic these indices would also deploy their funds into these stocks.
For funds and indices mimicking the STI such as the STI ETF with an AUM of approximately $1.5 billion, they would likely sell KDCR. KDCR had an STI weightage of just under 1% which implies institutional funds of at least $15 million would exit their position in KDCR.
In addition, other institutional investors may also exit KDCR if one of their investment criteria is to only invest in well known Singapore stocks that are part of major indices such as the STI.
Consequently, traded volume would likely also decline.
Although KDCR is out of the STI, KDCR is still part of indices such as the FTSE ST Reit Index and iEdge S-REIT Index
Is Keppel DC REIT still worth holding?
As the saying goes – The market is a voting machine in the short run and a weighing machine in the long run.
Keppel DC REIT debuted on SGX in 2014 as the first pure data centre REIT to list in Asia and remained till today as the only pure data centre S-REIT on SGX.
The REIT’s portfolio grew from 8 assets valued at $1.0 billion at IPO, to 23 assets across Asia Pacific and Europe valued at $3.8 billion as of 31 Mar 2023. It also has more than $2 billion in assets that it can potentially acquire from the various business units in Keppel.
KDCR has an aggregate leverage ratio of 36.8% and a cost of debt of 2.8%. The net asset value (NAV) per unit is $1.37 which implies that the stock is trading at a 51% premium to NAV. As the stock price is trading at a premium, it is not difficult for KDCR to carry out NAV and DPU accretive acquisitions.
KDCR has a high portfolio occupancy of 98.5% a strong WALE of 8.2 years.
It also has a well diversified and high quality client base. The majority of rental income is derived from clients with investment grade or equivalent credit profiles.
It is also a known fact that the top tenant for KDCR is Amazon, contributing more than one-third of rental income.
KDCR has also diversified itself by sector with exposure to not only the Internet and IT sectors but also telecoms and financial services.
To mitigate against inflation, KDCR has built in rental escalations based on CPI or similar indexation embedded in more than half of the portfolio. For the remaining half of the portfolio without escalations, the WALE is approximately 2.0 years which means that there would be adjustments to market conditions upon renewal.
Currently, the data centre industry still sees strong demand for space with limited supply of high quality locations. Hence, rental reversions are still likely to be positive.
In the current interest rate environment, poor capital management could lead to the downfall of a REIT.
KDCR has the bulk of debt expiring from 2026 and beyond and has completed refinancing of all debt due in 2023. Its Interest rates exposures are mitigated with 73% of loans fixed
Currency fluctuations can also take a huge chunk out of DPU, consequently, distributions arising from foreign assets have been substantially hedged till end 2023 and progressively being hedged till June 2024.
Alvin also shared his thoughts on Keppel DC REIT’s business here.
What’s next for Keppel DC REIT shareholders?
Singapore forms a small part of global institutional fund flows. Many companies listed on STI are well known only to local investors. As such, many overseas investors only look at investing in the STI or in the stocks included in the STI.
There is likely to be a negative longer term effect from the exclusion of the STI. For example, ComfortDelgro which was removed from the STI in September 2022 saw its share price fall from $1.40 in September 2022 to a low of $1.01 in June 2023. Other stocks that have left the STI includes SPH, Olam and F&N.
We cannot think of a single stock that has done well since being dropped from the STI, for readers who can think of any such stock, please share with us in the comments!
Perhaps this time could be different though. KDCR is the only pure play data centre REIT with a good track record and strong fundamentals with substantial growth potential.
If you’re part of the camp looking for opportunities, you may be thinking about investing in Seatrium. But should you? Let’s take a look:
What is Seatrium?
You may not be familiar with the name Seatrium, but you would definitely have heard of its previous name; “Sembcorp Marine”.
After its acquisition of Keppel Corp’s offshore and marine (O&M) division (which we covered here), Sembcorp Marine rebranded to Seatrium in order to better reflect its goal of becoming a global player in the O&M space.
Seatrium was demerged from Sembcorp Industries in 2020.
So…does Seatrium deserve a spot in your portfolio?
In November 2022, Seatrium (then known as SMM) disclosed that its order book was $18 billion, of which more than $12 billion in orders were secured in 2022. In March 2023, it disclosed that the order book has since increased to over $20 billion due to multiple project wins.
Renewables and cleaner/green solutions increased from 34% in November 2022 to 39% of the Group’s net order book. As a result of completion/delivery of projects, Seatrium’s debt to equity ratio decreased from 0.26x at the end of FY22 to 0.18x currently.
Amid the ongoing energy transition and heightened concerns for energy security, the industry outlook for oil & gas, offshore renewables and other green solutions continues to improve and strengthen.
Following completion of the merger, Seatrium disclosed that it has since embarked on a comprehensive strategic business review to unlock synergies and build a roadmap for sustainable growth. This strategic business review is targeted to be completed before the end of 2023.
Seatrium is now a company that has a strong balance sheet, sizeable order book and order pipeline underpinned by industry tailwinds.
However, Seatrium’s current market cap is nearly $9 billion. The company would have to deliver strong net margins on its revenue to justify a reasonable price to earnings ratio valuation.
Next steps for Seatrium will be to execute its order book, deliver strong profits and reward shareholders accordingly. For us, we would prefer to have more visibility on Seatrium’s execution before it deserves a spot on our portfolio.
