Keppel REIT - CGS-CIMB Research 2018-11-30: Partially Unlocking Value In Ocean Financial Centre


Keppel REIT - Partially Unlocking Value In Ocean Financial Centre

  • Keppel REIT is selling a 20% stake in Ocean Financial Centre for S$537.3m.
  • Sale to lift book NAV; use of proceeds includes paring down debt.
  • Maintain ADD with Target Price of S$1.34.

Selling 20% stake in OFC

  • Keppel REIT has announced it is selling a 20% stake in Ocean Financial Centre (OFC) to Allianz Real Estate for S$537.3m.
  • Post sale, Keppel REIT will retain a 79.9% stake. 
  • Ocean Financial Centre is a premium Grade A office building located at Raffles Place with 877,635 sq ft of net lettable area. The sale is expected to complete in Dec 18.

Above-valuation transaction boosts book NAV

  • The sale price of S$537.3m (for 20% stake) is 2.3% above the independent valuation of S$525.3m and 16.8% above its acquisition price of S$460.2m. On a psf basis, the deal works out to be c.S$3,061psf and translates into a stabilised historical annualised FY18 NPI yield of c.3.1%.
  • Post sale, Keppel REIT’s proforma book NAV could be lifted by c.1.4%. In addition to partially unlocking value in its asset, we think the transaction will focus investor attention on the robustness of its underlying NAV.

To recognise a one-off S$6.9m gain; gearing to be pared down

  • Keppel REIT will recognise an accounting gain of S$11.9m and a net-of-transaction-cost gain of S$6.9m from the sale. Proceeds from the sale will enhance Keppel REIT's financial flexibility, including helping it to pare down debt.
  • Depending on the final amount of debt repaid, management indicated that gearing could be reduced by 3.2% pts compared to the 39.1% as at 3Q18.
  • After the sale, the income vacuum (net of interest savings) could lower proforma DPU by 2.6%.

Maintain ADD

  • We see this deal as a mild positive for Keppel REIT. We leave our earnings and DDM-based Target Price of S$1.34 unchanged for now and maintain our ADD rating.
  • Upside risks include a faster-than-expected office rental recovery while downside risks include a slowdown in economic activity, which could impact appetite for office space.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://research.itradecimb.com/ 2018-11-30
SGX Stock Analyst Report ADD MAINTAIN ADD 1.340 SAME 1.340