Keppel REIT (KREIT SP) - Maybank Kim Eng 2017-01-25: FY16 a slight miss on lack of capital distributions

Keppel REIT (KREIT SP) - Maybank Kim Eng 2017-01-25: FY16 a slight miss on lack of capital distributions KEPPEL REIT K71U.SI

Keppel REIT (KREIT SP) - FY16 a slight miss on lack of capital distributions


Maintain BUY, but TP lowered 2% to SGD1.18 

  • FY16 was a marginal miss due to lower-than-expected capital distributions. 
  • We cut FY17-18 DPU by 2% each to reflect slightly higher vacancy and lower rents, as evidenced by the negative rental reversions reported. This led to a slight cut in our TP to SGD1.18 (from SGD1.21), based on a target yield of 5.25%. 
  • Nonetheless, reiterate BUY as elevated prices for office assets in the physical market will continue to support the sector’s valuation. 
  • Our target yield is close to its historical low to reflect strong capital value support and incorporates our relative preference amongst office REITs. 
  • Risks to our view include sharper-than-expected decline in office rents and overpaying for acquisitions.


Lower-than-expected capital distributions 

  • FY16 DPU was a marginal miss due to lower-than-expected capital distributions. No capital distributions were made in 4Q16 (4Q15: SGD5m).
  • Operating trends were broadly in line with the exception of sustained vacancy at Bugis Junction Tower (BJT). 
  • KREIT has a total of SGD48m of other gains that has not been distributed, which can support DPU downside amid the market weakness. 
  • With the exception of BJT, where its property value was cut by SGD10m to SGD540m, valuations of its Singapore assets remain unchanged. Higher valuations of its Australia assets reflect a 40-50bps cut in cap rate.


9% negative rental reversions for FY16 

  • KREIT recently announced a downwards revision to its rental reversions for 1H16 and 9M16. For FY16, the group reported negative rental reversion of 9% for all leases, including forward renewals, signed in the year. 
  • The small amount of leases due for renewal near term (FY17/18: 3.9%/7.1%) suggests a low risk of a sharp pick up in vacancy. However, we expect income weakness as negative rental reversions reported for FY16 includes forward renewals.


Cheap vs private market 

  • KREIT offers the best exposure to Singapore’s prime office market with assets in this sector accounting for 89% of its assets. 
  • The stock’s implied capital value of SGD2,200 psf and 4.2% cap rate remains attractive when compared to the replacement cost of a new office building (SGD2,800 psf) and the recent transaction of Asia Square Tower 1 (SGD2,704 psf).


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/ 2017-01-25
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.18 Down 1.210



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