RHB Research 2015-07-21: Keppel REIT - Still No Signs Of DPU Recovery. Reiterate NEUTRAL.

Still No Signs Of DPU Recovery

  • 1H15 DPU fell 11.6% YoY on divestment of Prudential Tower and a lack of rental support from Marina Bay Financial Centre (MBFC) Phase One and 87.5% interest in Ocean Financial Centre (OFC), meeting a mere 44% of our full-year estimate. 
  • Reiterate NEUTRAL with a lower DDM-based SGD1.13 TP (CoE: 6.7%, TG: 1%), implying a total return of 6.9%. 

 1H15 DPU still on the dip YoY. 

  • Keppel REIT’s 1H15 results missed our expectation with a 11.6% YoY decline in 1H15 DPU, meeting only 44% of our full-year estimate. 
  • We had expected the rental support from MBFC Tower 3 to be front-loaded, which is not the case (insofar only SGD3.7m each for two consecutive quarters). 
  • We have thus pushed back the support to latter years (beyond 2017). 
  • The decline in DPU was mainly attributable to the divestment of Prudential Tower on 26 Sep 2014. 

 Occupancy rate remains unchanged for now. 

  • Despite the closure of Standard Chartered Bank’s equity business at MBFC Tower 1, Keppel REIT’s portfolio occupancy rate remained steady QoQ at 99.3%. 
  • It achieved positive rental reversion of 18% on average in 1H15 (1Q15: 19%) and a retention rate of 84%, with 390,000 sq ft of office space signed. 80% of total leases by NLA are not due for renewal till 2017 and beyond. 
  • The REIT’s aggregate leverage remained high at 42.6% (one of the highest amongst 34 S-REITs). 
  • Keppel REIT completed early refinancing of its 2015-2016 maturing loans last quarter, extending its average term to maturity by 0.8 years to 3.9 years, albeit at higher borrowing costs (2.50% all-in from 2.47% previously) 

 AUD down 12.8% YoY against SGD. 

  • The Australian assets with direct rentals registered negative 1H15 revenue YoY growth of 2.9-5.7% following the weakening of the AUD. 
  • Keppel REIT stated that it has hedged almost 100% distributable income from Australia for the remaining 2015. 
  • Its sensitivity analysis stated NAV to drop by 1 cent and gearing to rise by 0.18%, should the AUD trade at parity to the SGD (currently 1 AUD = 1.013 SGD). 

 Remain NEUTRAL with a lower TP of SGD1.13 (from SGD1.18).

  • We adjust our DPU estimates downwards by 2.7-2.8% in FY16-17F, as we see headwinds in the office rental market with the onslaught of 4.8m sq ft of new office supply (see Figure 3). 
  • We reiterate our NEUTRAL recommendation with a lower TP of SGD1.13.

(Ong Kian Lin, Ivan Looi)

Source: http://www.rhbgroup.com/