Keppel REIT(KREIT SP) - Maybank Kim Eng 2017-10-18: Awaiting A Better Entry Point

Keppel REIT(KREIT SP) - Maybank Kim Eng 2017-10-18: Awaiting A Better Entry Point KEPPEL REIT K71U.SI

Keppel REIT(KREIT SP) - Awaiting A Better Entry Point


Positives priced in; Maintain HOLD 

  • Keppel REIT (KREIT)’s results were a slight miss due to the lack of capital distributions.
  • Beyond the headline miss, underlying performance was in line with our expectations with a small 3% negative rental reversion. 
  • While its gearing inched up by 30bps for higher debt taken to fund the acquisition of 311 Spencer Street, it remains comfortably below the regulatory limit. 
  • We cut our FY17E DPU for this, but kept FY18-19E largely unchanged. We rolled forward our valuation basis and trimmed Target Price to SGD1.16, based on an unchanged target yield of 5.25%. With the REIT trading at historically low yields, we believe the improving office outlook has been priced in. Maintain HOLD as we await a better entry point. 
  • Potential asset sales could provide upside catalyst to the stock as it trades at an undemanding 0.85x P/BV. 
  • Prefer CapitaLand Commercial Trust (CCT SP, BUY, Target Price SGD1.81) for sector exposure.



Missed on lack of capital distributions 

  • KREIT reported results that were below expectations. The lack of capital distributions for the fourth consecutive quarter was the key negative variance that drove 9M17 DPU down by 12.7% YoY to 4.27 SGD cts. 
  • We are not surprised at the small 3% negative rental reversion in the period as market rents are still low. 
  • Overall, occupancy remains at a high 99.6%.


Higher gearing due to 311 Spencer acquisition 

  • Gearing inched up by 30bps QoQ to 38.8% to reflect higher debt taken to fund the acquisition of 311 Spencer Street. Even if we count the SGD150m perpetual securities as debt, the adjusted gearing of 40.6% remains comfortably below the regulatory limit of 45%. 
  • As the building won’t be completed until 4Q19, we see DPU remaining under pressure into FY19E.


Consultants flagged a slight uptick in Grade A rents 

  • Preliminary data from CBRE showed a slight 1.7% QoQ increase in Grade A rents in the quarter to SGD9.10 psf. While the office market has clearly bottomed, near-term upside to rents could be limited as vacancy levels remain high.


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/ 2017-10-18
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.16 Down 1.180



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