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