KEPPEL REIT
K71U.SI
Keppel REIT (KREIT SP) - Underlying Weakness
Raise TP on Lower Yield Target; Maintain HOLD
- We tighten our yield target for KREIT by 75bps to 6.75% and raise our yield-based TP to SGD0.97 from SGD0.88.
- Our lower target reflects signs that interest rates will stay low for longer.
- Singapore’s office sector has just tipped over and we see rents falling into 2018. We doubt that office REITs will outperform.
- Maintain HOLD. Within the office sector, CCT (HOLD, TP SGD1.40) is our preferred pick.
Should Trade below Peers
- We believe KREIT should trade below its peers and accordingly assign it a yield target that is 25bps over Suntec REIT and 50bps over CCT. Reasons are:
- its real gearing remains high. Although it brought down its headline gearing to 39.3% in 4Q15 (3Q15: 42.6%) by paying debt with proceeds from its SGD150m, 4.98% perpetual securities, this came at a higher cost. Deleveraging by selling more properties such as its impending sale of 77 King Street may be a better option, in our view;
- headline distribution of SGD217m in FY15 included SGD11m of capital distribution from its divestment of Prudential Tower. If office rents fall further as we predict, it may repeat this to hold up headline numbers. While this lends support to DPU, it does not reflect the underlying performance of its properties; and
- it has large exposure to the financial sector. Job growth in the banking, insurance and financial sector remains tepid, which could hit demand for office space. KREIT had 45% exposure to this sector by NLA as of end-2015.
Derrick Heng CFA
Maybank Kim Eng
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http://www.maybank-ke.com.sg/
2016-04-12
Maybank Kim Eng
SGX Stock
Analyst Report
0.97
Up
0.88
