Keppel REIT - Maybank Kim Eng 2018-07-17: Higher Signing Rents

Keppel REIT - Maybank Kim Eng Research 2018-07-17: Higher Signing Rents KEPPEL REIT SGX:K71U

Keppel REIT - Higher Signing Rents


Maintain HOLD; Target Price SGD1.19 post 1H18 results

  • 1H18 core distributable income was in line with our and the street expectations. Keppel REIT booked a large one-off pre-termination income for a tenant whose leases were scheduled to expire in 2020. Average rents signed at its Singapore offices improved along with the strengthening market.
  • Management believes its stock price is undervalued and announced a share buyback programme effectively immediately.
  • Maintain HOLD and SGD1.19 Target Price based on a target yield of 5.25%.
  • We find the stock fairly valued with the trading yield of the REIT near historical lows. Prefer UOL Group (SGX:U14) (Rating: BUY; Target Price SGD8.95) for office exposure.



Signing rents inched higher

  • Keppel REIT‘s 1H18 distributable income of SGD96.6m was in line at 48% of our core estimate. Apart from a large pre-termination income received, income contributions from its buildings were broadly within our expectations.
  • Signing rents for its Singapore offices rose to SGD10.74 psf pm in 1H18. This is an improvement from SGD10.05 for leases signed in 1Q18 and SGD9.80 for the entire 2017. This was corroborated by the 4.1% q-o-q increase in Grade-A rents of SGD10.10, as reported by CBRE.


Booked large pre-termination income

  • Keppel REIT booked yet another large one-off pre-termination income worth SGD12m in the quarter.
  • Citing tenant confidentiality, management declined to provide specific details, except that its original leases were due to expire in 2020. However, with a significant increase in income from Ocean Financial Centre, we infer that the pre-termination was from this building. Banking and financial services firm ANZ now accounts for 3.8% of committed NLA, from 5.1% in 1Q18.


Commencing share buyback

  • Management believes its unit price is undervalued and intends to commence a share buyback programme using excess working capital. (See latest share buyback transactions.) In order to comply with restrictions on the takeover code, it could purchase up to 1.5% of outstanding shares over a six months period. This translates into a potential cash utilisation of SGD58m at the current Keppel REIT share price
  • Separately, management confirmed it still has SGD48m of capital gains that could be reinvested or distributed to shareholders.


Swing Factors


Upside

  • Appreciation in the capital value of its properties.
  • Divestment of fringe assets to reduce leverage.
  • Earlier-than-expected rebound in office rents.

Downside

  • Sharper-than-expected decline 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 Research | https://www.maybank-ke.com.sg/ 2018-07-17
SGX Stock Analyst Report HOLD Maintain HOLD 1.190 Same 1.190



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