Keppel REIT - RHB Invest 2018-12-03: Divests 20% Stake In Ocean Financial Centre


Keppel REIT - Divests 20% Stake In Ocean Financial Centre

  • Maintain NEUTRAL and SGD1.06 Target Price, 8% downside.
  • Keppel REIT’s latest move to divest a partial stake in OFC should help address high gearing concerns and reduce the need for potential equity fund raising. Still, the divestment would further dent near-term DPU, which has been declining due to negative rent reversions and lower income support.
  • DPU is expected to see some pick-up in 2020 with 311SS’ completion and flow through effect of positive rent reversions (2019).
  • Share buyback limits downside.

Transaction fairly priced.

  • Keppel REIT announced the divestment of 20% stake in Ocean Financial Centre (OFC) to Allianz Real Estate for SGD 537.3m. The agreed property value (100% basis) of SGD 2.7bn, is a 2.4% premium to latest (Nov 2018) valuation, and 17% higher than its purchase price.
  • The sale price translates to SGD3,061psf of NLA and exit net property income (NPI) yields of 3.1% pa (based on last 12 months NPI), which seems fair, considering the REIT will still hold majority 80% stake in the asset.
  • Keppel REIT will recognise a net gain of SGD6.9m post transaction costs. The sale is expected to be completed in Dec 2018.

A prudent move that mitigates high-gearing concern.

  • As at 3Q18, Keppel REIT’s gearing of 39.1% was among the highest SREIT. It is expected to increase further to ~41% by next year with the progressive payments of 311 Spencer Street (31SS), raising potential equity fund raising concerns.
  • The move however mitigates these concerns, as management noted that a significant amount of the proceeds will be used to pare down debt, and gearing is expected to fall to 35.9%, post transaction.

DPU impact.

  • Our FY19F-20F DPU is lowered by 1-2% taking into account loss of income and debt repayment.
  • We believe management may use some of the gains from the proceeds to offset some of the shortfall in near-term DPU.

Active share buyback limits downside.

  • Keppel REIT has been actively buying back shares in 2H18, and has since bought back 13.5m shares YTD in the SGD1.10- 1.20 price range.

Maintain NEUTRAL

  • Maintain NEUTRAL with a SGD1.06 Target Price, based on the DDM model (COE: 7.1%, risk free rate: 3%, TG: 2%).
  • Keppel REIT’s FY19F-20F dividend yields of 4.8% and 5.4% are fair in our view.
  • Key catalysts are stronger office demand, and continue fund flows into the REIT sector.
  • Key risks are dilutive fund-raising, and unexpected slowdown in the office sector demand.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-12-03
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 1.06 DOWN 1.070