Keppel REIT - DBS Research 2016-01-06: Young, modern, and strategically located office portfolio

Keppel REIT - DBS Research 2016-01-06: Young, modern, and strategically located office portfolio KEPPEL REIT K71U.SI 

Keppel REIT - Young, modern, and strategically located office portfolio 


BUY on attractive valuations. 

  • K-REIT’s share price performance has lagged other large cap S-REIT peers in recent months, and we believe it is time to play catch-up as fears of a drop in DPU is already priced in. 
  • We have a BUY recommendation on K-REIT, with TP of S$1.12

Modern portfolio should weather office supply wave well. 

  • While there will be more supply in 2016-2017, we believe that KREIT’s asset portfolio, which comprises some of the most sought-after properties in Singapore will be resilient. 
  • In addition, earnings should be shielded to an extent by a long lease expiry profile - 70% of its NLA will only be renewed from 2017. 

MBFC acquisition to mitigate expiry of OFC income support. 

  • With the expiry of income support at Ocean Financial Centre (OFC) in 1Q15 and the divestment of Prudential Tower in 3Q14, we have forecasted a 9% decline in DPU in FY15 but recent results seem to be performing better than expectations. The decline is partly mitigated by contribution from the recently acquired MBFC Tower 3. 
  • Looking ahead, we expect DPUs to remain fairly flattish. 

Valuation: 

  • Our target price of S$1.12 is based on the discounted cash flow (DCF) model, as K-REIT generates recurring rental income from its tenants. At its current price, K-REIT offers investors a dividend yield of 7.7% for FY16F
  • We have a BUY recommendation. 

Key Risks to Our View: 

  • Shadow space could limit rental growth. Close to 50% of KREIT’s leases are from the banking, insurance, and financial sectors. As financial institutions are generally shrinking their footprint, shadow space could be a problem if the Manager is unable to find new tenants to replace them. 




Derek Tan DBS Vickers | Mervin Song CFA DBS Vickers | http://www.dbsvickers.com/ 2016-01-06
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.12 Same 1.12


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