Keppel REIT - CIMB Research 2016-01-19: Muted outlook priced in

Keppel REIT - CIMB Research 2016-01-19: Muted outlook priced in KEPPEL REIT K71U.SI 

Keppel REIT - Muted outlook priced in 

  • Results in line with market estimates. 
  • Achieving slightly positive rental reversions in 4Q. 
  • Tenant retention is key focus in FY16 with expiring leases currently under advanced negotiations. 
  • Sale of Sydney property at a premium to book, should unlock value as well as pare down gearing. 
  • Maintain Add with a revised target price of S$1.08. 

■ Results slightly below our but in line with market estimates 

  • Keppel REIT (KREIT) reported 4Q15 distribution income of S$54m and DPU of 1.68 Scts (+11.3% yoy), thanks to higher income from MBFC3, 8 Chifley Square and an office tower in Perth. 
  • This more than offset a relatively flat topline, absence of rental support from OFC and MBFC1 as well as higher interest cost. 
  • On a full-year basis, FY15 DPU of 6.8 Scts was 6% lower yoy and formed 99% of our forecast due to income vacuum from the sale of Prudential Tower and a weaker A$. 

■ Still achieving slightly positive rental reversions 

  • Notably, KREIT renewed 480,000sf of NLA in 4Q at positive single digit reversions over previous levels. An estimated 80% of the leases are new to KREIT/Singapore and the balance from renewal/expansion activities. There was robust demand from TMT tenants including names such as Netflix. For FY15, it achieved an average 13% positive rental reversion across its portfolio. 

■ Advocating tenant retention strategy 

  • Going into FY16-17, KREIT has 16.7% and 14.8% of leases to be re-contracted. It is in advanced negotiations for leases expiring this year and guided that it is likely to achieve a high retention rate. 
  • Given the current competitive rental market and the large incoming supply of new inventory, we expect market rents to dip by 10% this year. 
  • KREIT’s expiring rents are 10-15% below current market levels and we expect these renewals to be relatively neutral to earnings. 

■ Unlocking value from asset sale 

  • KREIT revalued its portfolio at end FY15 and clocked in a S$197m revaluation surplus and lowered gearing to 39.3%. 
  • The recent sale of the 77 King St property in Sydney for A$160m, or at a 27% premium to its latest book value, will lower its leverage ratio by a further 1-2% pts in addition to unlocking value. 
  • KREIT will recognise a A$28m gain, which is factored into our FY16 estimates. 

■ Maintain Add 

  • Overall, we raise our FY16 DPU estimates by 16% but pare down FY17 DPU by 4.3% to factor in the A$28m divestment gain and additional interest cost from the issue of S$150m perpetual securities. 
  • Thus, we lower our DDM-based target price by 6% to S$1.08. KREIT is trading at 0.61x P/BV and offers investors a normalised (excluding divestment gain) DPU yield of 8%. 
  • At this level, we believe much of the weak office market outlook has been priced in and maintain our Add rating.

LOCK Mun Yee CIMB Securities | YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-01-19
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 1.08 Down 1.15