Is Ascendas Reit (A17U) a Buy or a Sell After Its Recent Acquisition of Data Centres in Europe in 2021?
If you are starting to take notice of Ascendas-Reit (A-Reit) after its recent acquisition of a few data centres in Europe, welcome to the party.
I have always like data centres especially after my good call on Keppel DC Reit (AJBU.SI) at a time when nobody else is paying much attention to it. It has since overrun by a tad too much so let’s put that aside for now and come back to A-Reit.
Love for Data Centres
Being one of the first REITs that I have bought when I first started investing, A-Reit has always been at the back of my mind. You usually move on from your first loves after having more knowledge and experience (of losing monies) as you grow in investing.
This is especially so after they were mostly acquired by Capitaland Ltd (C31.SI). Never a big fan of CapitaLand as I know how bureaucratic it is inside; stable but don’t expect growth.
However, a recent news report on A-Reit acquiring data centres got me interested in them again. With these new 11 data centres acquired in Europe (a place I am interested in too, just not travelling wise), it will boost their DC investment percentage from 4% to around 10% in their portfolio.
With logistics warehouse and hi-tech science parks/offices, I won’t really call them exciting. Like their parent, just stable without much room for exponential growth. Can’t blame them though, like their parent, they are mostly owned by the “government of Singapore”.
Don’t get me wrong, warehouses are great for e-commerce and one of my biggest investment gains comes from the now delisted GLP when I buy into the e-commerce growth story before people in ASEAN are really using TaoBao. Can’t say the same for hi-tech science parks and offices, especially now that people are getting accustomed to working from home.
And data centre is a totally different beast altogether.
Like warehouses for e-commerce, when there is a boom in demand, one just can’t simply build warehouses (especially sophisticated ones) overnight. When demand grows, and it starts to squeeze out supply, prices will rise. This will benefit the owners of such assets greatly and e-commerce doesn’t seem like it is going to stop anytime soon. In fact, there is only room for improvement considering that only less than 30% of people in even advanced countries like Singapore (quoted from the former CMO of Lazada in a talk I attended) are going online to get their daily necessities.
But unlike warehouses, demand for data centres has almost zero boundaries.
There is no denying that people are not going back to using traditional mails over emails. No one will switch back to using a phone card and phone booth over of whatsapping through one’s smartphone. In fact, public phone booths are mainly present only in museums for most advanced countries.
When things are in digital format in an era of digital marketing, things almost never get deleted. Digital data like photos, videos, etc. don’t take up physical space and by the time you are running out of space, you will not know what to delete and what to keep.
Upgrading to more digital space at a small fee seems like a more logical choice over losing your memories in digital format. And this is where data centres come into play subtly in your life.
Space in data centres is so precious that data centres are unwilling to have a contract that commits them to a lower price for too long. Owners of data centres know that, by the time the current contract ends, the market price of data centre space rental is going to a few more percentage points higher than a few years back.
The hassle of moving data centres which include not only the physical movement but also the security evaluation & audit, stability of the connection, potential loss of data, etc. is enough to give CTOs sleepless nights
There is also a restriction in most countries where financial institutions (and some sensitive sectors) are supposed to keep all data that they have within the country that they are operating in. This restricts big financial firms to house their data in countries where they are based, preventing them to find the “cheapest” data storage solution that may be available in less advanced countries. Hence, having data centres in Europe, when financial firms are moving out of UK because of Brexit, seems like a no-brainer.
Above all, many tend to forget, data centres are also valuable fixed property assets and will rise in valuation especially in advanced countries.
Valuation
Next, let’s take a look at its current valuation (as of 31 Mar 2021). With a share price of $3.07, its market capitalisation stands at around $12.34 billion.
Just at face value, its P/E is almost similar to Keppel DC Reit’s 26.4 at around 25.5. In fact, with such diversification of assets classes, I would think it deserves to be higher than Keppel DC. But like I have mentioned, Keppel DC’s price has really run a little too far as of now.
For the 12 months ended 31 Dec 2020, its net profit stands at $457m with $278m cash in the bank and $4.143b in debt.
With another need for $904m to acquire those data centres in Europe, financial houses are beginning to give new targets for this daring REIT that is moving so aggressively into data centres.
Using my lazy way of calculating valuation, the “real” P/E being this additional $904m load goes at around 35.4 times.
Going a little further, ignoring Keppel DC Reit whose “real” P/E won’t be too pretty either, we have found a few other data centre play that are listed namely Equinix (EQIX), Digital Realty (DLR), QTS Realty (QTS), CyrusOne (CONE), and CoreSite Realty (COR).
Just on face value, these listed data centre plays have a P/E of:
EQIX: 161.44
DLR: 141.25
CONE: 195.39
QTS: loss-making
COR: 60.86
Is it me or are they a little overly rich in valuation? These valuations actually made A-Reit looks like a huge bargain.
Depending on why you are looking at A-Reit, e.g. dividend, paper gain, these numbers may mean very different things to you.
Personally to me, the direction in business sense is ticking all the right boxes in my imaginary checklist. With the knowledge of building, maintaining and upkeeping data centres, coupled with the years of experience in investing in property assets, I certainly think the 10% that its data centre segment currently takes up in its portfolio will grow by leap and bounds in years to come - both organically and through more acquisitions.
And like I have mentioned before and can’t keep emphasizing more on, I am a super bull on data centres.
