Keppel REIT - RHB Securities 2015-09-07: Still No Signs Of DPU Recovery.


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. 
  • We reiterate our NEUTRAL recommendation with a lower TP of SGD1.13.

Ong Kian Lin | Ivan Looi | http://www.rhbgroub.com/ RHB Securities 2015-09-07
NEUTRAL Maintain NEUTRAL 1.13 Down 1.18