Keppel REIT - Maybank Kim Eng 2015-09-08: High Leverage to Bite.

KEPPEL REIT K71U.SI 

High Leverage to Bite 

  • Cut FY15-17 DPU by 8.7% for lower market-rent assumptions & higher vacancies. 
  • High leverage magnifies negative impact of rent declines on DPUs. May divest assets to improve balance sheet. 
  • Downgrade to HOLD from BUY in view of muted office outlook. Lower TP to SGD0.88 from SGD1.32, now based on FY16 yield target of 7.25%, from DDM. 
  • Prefer CCT for sector exposure. 


What’s New 

  • We cut 2015-17 market-rent assumptions from +6%/-6%/+2% to - 1%/-10%/-3%. Given an impending market surplus, we also build in 3% vacancy rates for all its offices for FY16. We expect the impact on DPUs to be magnified by its 42.6% leverage as market rents fall in the year ahead. We cut FY15-17 DPU by 8.7%. 
  • We believe that management may consider asset divestments to improve its balance sheet. For example, divesting Bugis Junction Tower at its latest valuation of SGD527m could bring its leverage below 40%. 

What’s Our View 

  • While forward yields of 6.5%+ may appear attractive, we believe the REIT may struggle to perform in a muted office market. As such, we downgrade it to HOLD from BUY. 
  • We cut TP to SGD0.88 from SGD1.32 after a change in valuation methodology across our REITs from DDM to yield targets, 7.25% for Keppel REIT. 
  • For exposure to the office sector, we prefer CapitaLand Commercial Trust (HOLD, SGD1.25 TP).


Derrick Heng CFA | http://www.maybank-ke.com.sg/ Maybank KE 2015-09-08
HOLD Downgrade BUY 0.88 Down 1.32


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