Keppel REIT - Maybank Kim Eng 2015-10-20: Challenging Conditions to Continue

Keppel REIT - Maybank Kim Eng 2015-10-20: Challenging Conditions to Continue KEPPEL REIT K71U.SI 

Keppel REIT - Challenging Conditions to Continue 

  • 3Q15 DPU of 1.70 SGD cts marginally ahead with 9M15 at 80% of FY15F. Distribution included a SGD6m gain from divestment of Prudential Tower in 2014. 
  • Occupancy declined due to weakness at MBFC. Aggregate leverage & all-in-financing cost unchanged. 
  • Maintain HOLD with TP (7.25% yield target) raised to SGD0.90 from SGD0.88 after lifting DPU by 1-7%. Still, KREIT could struggle in a challenging office market. 


Slight Dip in Occupancy 

  • 3Q15 DPU of 1.70 SGD cts (-8.1% YoY, -1.2% QoQ) was marginally ahead with 9M15 at 80% of our FY15F. This was helped by a SGD6m distribution from gains related to the divestment of Prudential Tower in 2014. By receiving 100% of its management fees in units, KREIT managed to conserve cash and leverage at 42.6%. 
  • All-in-financing cost was unchanged at 2.5%. Forward exposure to interest-rate fluctuations should be mitigated by fixed rates for 72% of its borrowings. Occupancy in Singapore retreated 0.7ppt to 98.8%, led by weakness at MBFC. Although management concluded 82 leases in 9M15 for c.1.1m sf of space with positive rental reversions of 16%, it foresees challenging market conditions. This is due to a significant increase in office supply over the next two years amid a possible increase in interest rates. 

Challenging Conditions to Persist; Maintain HOLD 

  • We raise our FY15-17 DPU by 6.8%/2.1%/0.7%, although we continue to forecast declines into FY17. Accordingly, our TP climbs to SGD0.90 from SGD0.88, based on our FY16 yield target of 7.25%. 
  • We ascribe a 25bp premium over our 7% target yield for CapitaLand Commercial Trust (HOLD, TP SGD1.25) to reflect KREIT’s higher leverage. Despite its sharp-price correction in the past year, we think that KREIT could struggle in a challenging office market. 
  • Maintain HOLD.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2015-10-20
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 0.90 Up 0.88




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