KEPPEL REIT
K71U.SI
Keppel REIT(KREIT SP) - Awaiting A Better Entry Point
Positives priced in; Maintain HOLD
- Keppel REIT (KREIT)’s results were a slight miss due to the lack of capital distributions.
- Beyond the headline miss, underlying performance was in line with our expectations with a small 3% negative rental reversion.
- While its gearing inched up by 30bps for higher debt taken to fund the acquisition of 311 Spencer Street, it remains comfortably below the regulatory limit.
- We cut our FY17E DPU for this, but kept FY18-19E largely unchanged. We rolled forward our valuation basis and trimmed Target Price to SGD1.16, based on an unchanged target yield of 5.25%. With the REIT trading at historically low yields, we believe the improving office outlook has been priced in. Maintain HOLD as we await a better entry point.
- Potential asset sales could provide upside catalyst to the stock as it trades at an undemanding 0.85x P/BV.
- Prefer CapitaLand Commercial Trust (CCT SP, BUY, Target Price SGD1.81) for sector exposure.
Missed on lack of capital distributions
- KREIT reported results that were below expectations. The lack of capital distributions for the fourth consecutive quarter was the key negative variance that drove 9M17 DPU down by 12.7% YoY to 4.27 SGD cts.
- We are not surprised at the small 3% negative rental reversion in the period as market rents are still low.
- Overall, occupancy remains at a high 99.6%.
Higher gearing due to 311 Spencer acquisition
- Gearing inched up by 30bps QoQ to 38.8% to reflect higher debt taken to fund the acquisition of 311 Spencer Street. Even if we count the SGD150m perpetual securities as debt, the adjusted gearing of 40.6% remains comfortably below the regulatory limit of 45%.
- As the building won’t be completed until 4Q19, we see DPU remaining under pressure into FY19E.
Consultants flagged a slight uptick in Grade A rents
- Preliminary data from CBRE showed a slight 1.7% QoQ increase in Grade A rents in the quarter to SGD9.10 psf. While the office market has clearly bottomed, near-term upside to rents could be limited as vacancy levels remain high.
Swing Factors
Upside
- Appreciation in capital value of its properties.
- Divestments of fringe assets to reduce leverage.
- Earlier-than-expected rebound in office rents.
Downside
- Sharper-than-expected declines in office rents or occupancy.
- Overpaying for acquisitions.
- Higher financial leverage implies bigger exposure to interest-rate spikes than peers.
Derrick Heng CFA
Maybank Kim Eng
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http://www.maybank-ke.com.sg/
2017-10-18
Maybank Kim Eng
SGX Stock
Analyst Report
1.16
Down
1.180
