Keppel REIT (KREIT SP) - Maybank Kim Eng 2017-12-15: Upside To Asset Values

Keppel REIT (KREIT SP) - Maybank Kim Eng 2017-12-15: Upside To Asset Values KEPPEL REIT K71U.SI

Keppel REIT (KREIT SP) - Upside To Asset Values


Positives priced in; Maintain HOLD 

  • Keppel REIT (KREIT)’s portfolio of high quality office buildings makes it a key beneficiary of the impending recovery in Singapore’s office market. However, we doubt the upside to market rents can clear 2015 levels in the year ahead and expect negative rental reversion to persist. 
  • We raise FY18/19E DPUs by +2.3%/3.4% to incorporate higher market rents. Despite the upwards revision to DPUs, we believe the stock is fairly valued. 
  • Maintain HOLD with 3% higher TP of SGD1.19 based on a target yield of 5.25%, to reflect our relative preference within the sector. This is close to its historical low and reflects our view of a potential rebound in the office market.



Negative reversion for at least one more year 

  • With vacancies still high and plenty of secondary space surfacing in the year ahead, we doubt office rents can rally enough to clear 2015 levels next year. This implies that rental reversions should stay negative in 2018 considering the typical lease tenure of three years. As such, we expect underlying income to remain under pressure.


Unsure if a potential increase in asset values will be taken positively 

  • We believe there could be upside to the valuation of Keppel REIT’s portfolio at the end of the financial year. While the MBFC properties are held on the book of Hongkong Land (HKLD SP) at a cap rate of 3.25%, they are currently valued using a cap rate of 3.75% on Keppel REIT and Suntec REIT’s books.
  • This implies that there could be a revaluation boost from a tighter cap rate. Although book values will be lifted, asset management fees (0.5% of asset value + 3.0% of NPI) paid to its managers will also increase with a negative impact on DPUs.


Asset sale to be positive, but doubtful it will happen 

  • In theory, the current environment of high asset prices is ideal for asset sales. However, the lack of quality deals in the market today makes it harder to redeploy capital into new properties. Hence, unless a very compelling offer comes along, we doubt management will sell any of its assets. 
  • Furthermore, management is incentivised to grow its AUM; Keppel Capital aims to double its AUM over the next five years.


Swing Factors


Upside

  • Appreciation in the 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 occupancies.
  • Overpaying for acquisitions.
  • Higher financial leverage implies bigger exposure to interest-rate spikes than peers.




Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-12-15
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.19 Up 1.160



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