Keppel REIT - RHB Invest 2016-01-19: Fairly Valued For Now

Keppel REIT - RHB Invest 2016-01-19: Fairly Valued For Now KEPPEL REIT K71U.SI 

Keppel REIT - Fairly Valued For Now 

  • We upgrade Keppel REIT to NEUTRAL as its share price has fallen close to our DDM-derived TP of SGD0.83 (6% downside), implying FY15 P/BV of 0.58x (similar to pre-GFC levels). 
  • 4Q15 results were within our expectations. 
  • We estimate +8.7% rental reversion for the quarter, while the REIT has maintained almost-full occupancy levels. 
  • Factoring in a 15% decline in office rents, we expect positive rental reversion to soften to low single-digit this year. 

 Results in line; gearing level declined. 

  • Keppel REIT’s 4Q15/FY15 results were in line with our expectations with distribution per unit (DPU) at +11.3/-5.9% YoY, meeting ~97% of our full-year estimate. 
  • In efforts to reduce its high gearing, the REIT has pared down its debts to a moderate gearing level of 39.3%. 
  • In addition, it has almost fully hedged its income from Australia up till 3Q16, therefore minimising further risk of a weaker AUD. 

 Expect rental reversion to be under pressure in 2016. 

  • We estimate Keppel REIT’s rental reversion for the quarter at +8.7%, booking in an average positive rental reversion of 13% for the year. 
  • Looking forward, we expect rental reversion to soften further this year to a positive low single-digit as we factor in a 15% decline in the overall office rental rates. 
  • In addition, occupancy levels for its portfolio inched up to 99.3% as it is closed to fully lease its vacant space left by other financial institutions that had ceased their operations last year. 

 Divestment of Australian asset provides more financial flexibility. 

  • The REIT has also announced divestment of an Australian asset (77 King Street) to Invesco Asia for a sum of AUD160m, implying a cap rate of 5.1%. 
  • Given that the average cap rate for Grade A offices in Sydney ranges from 5.5-6.5% (Savills Australia), we think that the divestment was executed at a good pricing. 
  • In addition, we think that the divestment gain of AUD28m is able to provide the REIT more financial flexibility. 

 Upgrade to NEUTRAL while maintaining SGD0.83 TP. 

  • Given that share price has fallen close to our TP, we upgrade our recommendation to NEUTRAL (from Sell). 
  • The challenging office leasing market may cap any upside, in our view.

Ivan Looi RHB Invest | http://www.rhbinvest.com.sg/ 2016-01-19
RHB Invest SGX Stock Analyst Report NEUTRAL Upgrade SELL 0.83 Same 0.83