Keppel REIT (KREIT SP) - Maybank Kim Eng 2016-10-19: Weathering the storm

Keppel REIT (KREIT SP) - Maybank Kim Eng 2016-10-19: Weathering the storm KEPPEL REIT K71U.SI

Keppel REIT (KREIT SP) - Weathering the storm


Maintain BUY and SGD1.21 TP 

  • 3Q16 income was broadly inline.
  • We fine-tune our DPU estimates by < 1%, retain our BUY rating and SGD1.21 TP, based on a target yield of 5.25%. 
  • We expect KREIT to trade at record low yields. This is sustained by the global hunt for yield assets amid the persistently low interest rate environment and relatively stable capital values of office properties. 
  • We believe a strong bid for Central Boulevard’s land tender could be seen as positive for sector sentiment. Furthermore, latest (3Q16) office rent estimates by CBRE are showing early signs of a bottom with the pace of rent decline slowing.


Temporary loss of income at BJT; Offices at Raffles Place and Marina Bay fully leased 

  • 3Q16 income was broadly inline; 9M16 made up 74% of our forecast. 
  • Revenue fell by 6.3% due to the divestment of 77 King Street in Jan and lower income from Bugis Junction Tower (BJT) after the closure of California Fitness. 
  • Management has since backfilled the majority of the vacated space with committed occupancy for BJT at a healthy 95%. It renewed all outstanding leases for the rest of the year and lifted occupancy for its offices at Raffles Place and Marina Bay to 100%. 
  • 3Q16 capital distributions is down to SGD3m (3Q15: SGD6m; 2Q16: SGD5m). 


Well-positioned to weather the storm 

  • We think KREIT is well-positioned to weather the storm. 
  • With just 5.2%/5.4% of leases up for renewal in FY17/18, it is less exposed to the impending weakness in Singapore’s office sector. 
  • Furthermore, we believe the market will continue to reward the REIT for its income stability from the long WALE of 6.1 years (vs typical leases of three years). 
  • Nonetheless, with average rents up for renewal over the next two years at low-SGD9 psf, it may still report slightly negative rental reversions as office rents drift lower in the year ahead. 


Central Boulevard could reinforce book value 

  • With over 80% of its assets in close proximity to the land parcel at Central Boulevard, we think a potentially strong bid could reinforce capital values of its assets and drive the REIT closer to its book value. 


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/ 2016-10-19
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.210 Same 1.210



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