CIMB Research 2015-07-21: Keppel REIT - Outlook Remains Stable. Maintain HOLD.

Outlook remains stable 

  • KREIT’s 2Q15 DPU was in line with expectations, with 2Q making up 24% and 1H forming 48% of our full-year forecast. 
  • 2Q15 NPI was hit by the lack of contribution from Prudential Tower and the drop in income support from MBFC1 and OFC, which was partially offset by the stronger performance in OFC and Bugis Junction. 
  • DPU was partially supported, with management taking 100% of its management fees in units and better associates and JV contributions. 
  • With a continual challenging outlook on the office rental market, we maintain our Hold rating with an unchanged DDM-based (discount rate: 8.4%) target price of S$1.20. 

2Q results in line with expectations 

  • Keppel REIT reported a 9.3% drop in 2Q15 topline to S$43m, while NPI came in 11.4% lower yoy to S$34.7m due to the divestment of Prudential Tower and absence of rental support from both MBFC1 and 87.5% of OFC. 
  • This was offset by higher profits from OFC and Bugis Junction as well as better associates and JV contributions and higher net tax and other adjustments, which helped to boost distribution income to S$54.8m (DPU: 1.72 Scts). 

Outlook remains stable 

  • The trust renewed 390ksf of space in 1H15 with a positive rental reversion of 18% and maintained portfolio occupancy at 99.3%. It has also leased 100% of the space that had been returned by tenants to date. 
  • In view of the large upcoming supply, the trust’s strategy would be to focus on tenant retention. To this end, it only has 2.6% of leases to be renewed/reviewed for FY15 and another 21.8% due in FY16. 
  • With current market rents still 10-20% above expiring levels, we believe that the trust should continue to see positive rental reversions. 
  • Management revealed that it could potentially have another 100ksf of space that could be returned this year, and they will actively manage it when this comes through. 
  • In terms of capital management, it has completed refinancing loans due in FY15 and has partially refinanced loans expiring in FY16 (70%). 
  • While its gearing of 42.6% is one of the highest in the S-REIT space, management guided that this could potentially be managed via asset sales, although nothing concrete is in the works. 

Maintain Hold 

  • Barring any sizeable new acquisition targets on the back of high upcoming supply in 2016, we believe that KREIT is fairly valued at the current level. 
  • We maintain our Hold rating on KREIT as it currently trades at an estimated 6.1% FY15/16 dividend yield - similar to its peers’ average.

(PANG Ti Wee; LOCK Mun Yee; TAN Xuan, CFA)

Source: http://research.itradecimb.com/