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
0.88
Down
1.32
