Keppel REIT - DBS Research 2016-04-15: Still offers outstanding value

Keppel REIT - DBS Research 2016-04-15: Still offers outstanding value KEPPEL REIT K71U.SI 

Keppel REIT - Still offers outstanding value 

  • 1Q16 DPU of 1.68 Scts in line 
  • Post renewals in 1Q16, only 3% of 2016 leases to be renewed 
  • Should Grade A office rents bottom out at c.S$9, risk of negative rental reversions reduced 

Remains attractive despite recent rally. 

  • KREIT’s share price has rallied recently following the large underperformance last year. However, KREIT still remains attractive given a still decent 6.6% yield and having significantly derisked its portfolio. 
  • Through its proactive lease renewals, KREIT has mitigated against downside risk to occupancies and rental rates. Thus, we maintain our BUY call with a higher TP of S$1.11. 

FY16 earnings derisked. 

  • We believe the impact on DPU from the potential loss of key tenants or negative rental reversions in 2016 has reduced considerably. Post renewals in 1Q16, only 3% of leases have yet to be renewed for the remainder of 2016. 
  • In addition, risk of negative rental reversions is low in the near term, given expiring rents (between S$8.50 to low S$9’s) remain below recent signing rents of S$10.30 and core CBD Grade A rents of S$9.90. 
  • Furthermore, with c.S$60m of disposal gains yet to be distributed, KREIT has the flexiblity to stablise its DPU over the coming year. 

Still trading at 30% discount to book. 

  • As at end March 2016, KREIT’s NAV per share stood S$1.42 (after excluding distributions). 
  • With the stock trading a 30% to its book value or at -0.5 SD P/B, we believe a large proportion of the potential downside risks to earnings and/or capital values from a weakening office market has been priced in. 

Valuation: 

  • With limited earnings risks to FY16 earnings, we have reduced our beta assumptions from 0.85 to 0.80, which results in our DCF-based TP rising to S$1.11 from S$1.03. At its current price, K-REIT offers investors an attractive 6.6% yield and 11% capital upside. 

Key Risks to Our View: 

  • A key risk to our view is the new offices supply causing spot rents to fall below S$7 psf, which will likely lead to lower asking rents, coming in below our expectations. 




Derek Tan DBS Vickers | Mervin Song CFA DBS Vickers | http://www.dbsvickers.com/ 2016-04-15
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.11 Down 1.12


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