Singapore REITs - DBS Research 2017-05-17: Cycling Up ~ Our Stock Calls

Singapore REITs - DBS Vickers 2017-05-17: Cycling Up Singapore REITs To Buy Broker Recommendation ASCENDAS REAL ESTATE INV TRUST A17U.SI KEPPEL REIT K71U.SI MAPLETREE LOGISTICS TRUST M44U.SI KEPPEL DC REIT AJBU.SI FRASERS LOGISTICS & IND TRUST BUOU.SI

Singapore REITs - Cycling Up ~ Our Stock Calls 

  • Wide yield spreads underpin investment case for S-REITs.
  • Top picks – Large cap: AREIT, KREIT and MLT; Mid cap: KDCREIT, FLT and CDREIT.



Continued from Singapore REITs - DBS Research 2017-05-17: Cycling Up


Despite known investor concerns, yield spreads are still supportive of investments into S-REITs. 

  • While sentiment towards S-REITs continue to be muted from investors at large due to fears over rising interest rates and modest DPU growth this year, we believe S-REITs still offer decent returns. 
  • Our view is supported by the fact that the current yield spread (i.e. absolute yield less 10-year Singapore bond yield) stands at 4.2%, in line with its average since 2010 of 4.2% but slightly above the long-term average of 3.8%. 
  • We believe at current levels, the yield spread provides a buffer to a potential rise in interest rates. Demonstration of resiliency of the S-REIT sector can be seen from the 4.2% total return (6.8% on an annualised basis) achieved since September 2016, despite two rate hikes by the Federal Reserve.


Fall in borrowing costs contrary to expectations 

  • While investors have been fearful of rising borrowing costs, in 1Q17 S-REITs in general reported a dip in borrowing costs on the back of falling credit spreads as well as changed their borrowing mix to cheaper source debt (i.e. EUR and JPY).
  • Going forward, we believe borrowing costs will eventually rise as benchmark interest rates increase. However, as discussed in previous reports, the increase will be staggered as c.80% of borrowings costs have been fixed.


Top picks – Large cap: AREIT, KREIT and MLT; Mid cap: KDCREIT, FLT and CDREIT 

  • Given our positive stance on the office sector, our top pick within the sector is KREIT (BUY, TP S$1.23). KREIT trades at the biggest discount to book value of around 25% but has the largest exposure to Premium Grade A buildings in Singapore, which we believe will be best placed to take advantage of the expected upswing in the Singapore office market.
  • We also maintain AREIT (BUY, TP S$2.65) as one of our top picks. Its large diversified portfolio provides the group with flexibility to undertake redevelopments without materially affecting its DPU. AREIT’s strong balance sheet also provides sufficient headroom to pursue DPU-accretive acquisitions. In addition, its large exposure to business park space which faces limited supply is an attractive attribute.
  • Within our large-cap picks, we have replaced MCT (BUY, TP S$1.62) with MLT (BUY, S$1.28) given MCT’s strong performance and MTL’s better risk-reward profile. For MLT, we believe the REIT is now on a sustained recovery path, as the REIT has largely completed the repositioning of its portfolio which had been negatively impacted by the conversion of several single-tenanted properties into multi-tenanted ones.
  • In the mid-cap arena, we continue to like KDCREIT (BUY, TP S$1.30) for its exposure to the growing demand for data as well as its strong balance sheet. Similarly for FLT (BUY, TP S$1.10) we believe its low gearing provides opportunities for DPU-accretive acquisitions. FLT provides good cashflow visibility given its long WALE and clear organic growth as a result of its embedded annual rental escalations. 
  • Finally, we removed CRT (BUY, TP S$1.15) from our top picks list. While we see upside from a potential takeover, we see better value with CDREIT (BUY, TP S$1.75) at the moment. We believe CDREIT offers investors the best leverage to an eventual recovery in the Singapore hospitality market and provides an additional boost via its recent acquisitions.








Mervin SONG CFA DBS Vickers | Derek TAN DBS Vickers | Rachel TAN DBS Vickers | http://www.dbsvickers.com/ 2017-05-17
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.650 Same 2.650
BUY Maintain BUY 1.230 Same 1.230
BUY Maintain BUY 1.280 Same 1.280
BUY Maintain BUY 1.300 Same 1.300
BUY Maintain BUY 1.100 Same 1.100



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