Keppel REIT (KREIT SP) - Maybank Kim Eng 2016-09-08: Strong office prices could reinforce book value

Keppel REIT (KREIT SP) - Maybank Kim Eng 2016-09-08: Strong office prices could reinforce book value KEPPEL REIT K71U.SI

Keppel REIT (KREIT SP) - Strong office prices could reinforce book value


U/G to BUY; yields to narrow 

  • We upgrade KREIT to BUY from HOLD with a higher yield-based TP of SGD1.21. 
  • While cutting market-rent assumptions by up to 14%, we apply a new target yield of 5.25% (from 6.25%). This is a record low since GFC, reflecting stable capital values for office properties and a potential bottoming of office rents in the next 5-6 quarters. 
  • We believe a strong bid for Central Boulevard’s land tender could send a positive signal for office values. 
  • Low interest rates should also sustain the global hunt for yields, including stable income-producing office REITs.


Central Boulevard could send positive office signal 

  • With offices in Singapore accounting for 90% of its portfolio, we deem KREIT the best proxy for the office REIT sector. June’s record price of SGD3.38b paid for Asia Square Tower 1 has set a good benchmark for property values in the Marina Bay vicinity. 
  • We believe a strong bid for the Central Boulevard site in November could reinforce office values in that area. With half of its properties found there, we expect positive sentiment on KREIT. 
  • At 0.85x P/BV, the market appears sceptical but we see an upcoming positive bid lifting KREIT closer to its book value.


DPUs could fall 

  • Despite high financial leverage, low interest rates imply comfortable financing costs. It would be even better if management divests fringe assets such as Bugis Junction Towers and cut its leverage in a sustainable manner. 
  • Paying down debt by issuing perpetual securities in 2015 is an expensive way to deleverage, in our view. 
  • We cut KREIT’s FY16-18 DPU by a larger 6.1% than peers, after lowering market-rent assumptions. The bigger cut mainly reflects its higher financial leverage.


Risks 

  • Our forecasts assume a bottoming of office rents by end-2017 and the start of a recovery in 2018. A prolonged office downcycle poses risks to our estimates.


Swing Factors


Upside

  • Appreciation in capital value of its properties.
  • Divestments of fringe assets to reduce leverage.
  • Earlier-than-expected rebound in office rents.

Downside

  • Sharper-than-expected declines in office rents or occupancy.
  • Overpaying for acquisitions.
  • Higher financial leverage implies bigger exposure to interest-rate spikes than peers.




Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-09-08
Maybank Kim Eng SGX Stock Analyst Report BUY Upgrade HOLD 1.21 Up 1.050


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