Keppel REIT - DBS Research 2017-01-25: Still cheap despite disappointments

KEPPEL REIT K71U.SI

Keppel REIT - Still cheap despite disappointments

4Q16 DPU of 1.48 Scts (-12% y-o-y) slightly below expectations due to absence of capital distribution.
Awaiting clarity from new CEO over capital distributions - 7% cut in FY17F DPU in the interim.
Additional forward renewals further reduces earnings risk for FY17.

Keppel REIT (KREIT)’s share price has rallied over 25% since late January 2016 but took a breather in recent months on the back of the resignation of its ex-CEO Ms Ng Hsueh Ling, spike in the 10-year bond yield, and clarification over its past rental reversions.
We believe the rally will resume as KREIT is cheap on a per square foot (psf) basis and as investors position themselves for a potential recovery in the office market in 2018. Thus, we maintain our BUY call with TP of S$1.23.

The impact on DPU from the potential loss of key tenants in 2017 and 2018 has reduced considerably. With forward renewal efforts, there are only 4% and 7% of leases left to be renewed in 2017 and 2018 respectively. While expiring monthly rents over the next two years are in the low S$9 psf level, close to current Grade A rents of S$9.10, we believe the premium status of KREIT’s properties will help mitigate the potential decline in overall office rents.
Furthermore, with S$50-60m of disposal gains yet to be distributed, KREIT has the flexibility to stabilise its DPU ahead.

KREIT’s Singapore Grade A office portfolio is trading at an implied value of c.S$2,400 psf compared to recent office market transactions of between S$2,700 to S$3,500 psf.
With abundant liquidity as well as long term investors positive on the Singapore office market and looking beyond short term supply headwinds, we believe capital values for office properties will remain resilient in the near term. Hence, KREIT’s discount to the physical market is unwarranted.

We maintain our DCF-based TP of S$1.23.
Our TP implies a valuation of c.S$2,570 psf for KREIT’s Grade A offices in Singapore.

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

Mervin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-01-25

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.23 Same 1.230