Simons Trading Research

Author: simonsg   |   Latest post: Thu, 18 Apr 2019, 9:53 AM


Keppel REIT - Unattractive Despite Office Momentum

Author: simonsg   |  Publish date: Thu, 18 Apr 2019, 7:32 PM

  • Maintain NEUTRAL with new Target Price of SGD1.12 from SGD1.06, 10% downside. Our Target Price is still at low end of consensus.
  • Keppel REIT's 1Q19 results met. While office rent reversions came in strongly at +14%, earnings outlook remains weak due to absence of rental support, tenant movement at its properties, and divestment of OFC.
  • Keppel REIT's share price however remains supported by share buyback, and strong fund flows into the REITs sector. We lower our COE assumptions by 30bps to 7.2%, resulting in higher Target Price.

Exploring Acquisition Opportunities in Existing and New Markets

  • KEPPEL REIT (SGX:K71U)’s gearing has come down to 35.7% with the recent divestment of 20% stake in Ocean Financial Centre (OFC) giving it ~SGD0.5bn debt headroom for acquisitions (assuming 40% gearing).
  • Management noted that it is exploring new markets like South Korea and Japan in addition to its existing markets of Australia and Singapore, but will mainly target Grade-A CBD properties.
  • Keppel REIT also recently issued its maiden SGD200m in convertible bonds to boost funding options and lower funding costs.

Positive Double-digit Rent Reversions Recorded in 1Q19

  • About 136,400 sqf (attributable ~57,100 sqf) of leases were signed during the quarter with 50% of them being new leases. New leases mainly came from technology, media and telecommunications, and banking sectors.
  • Management noted that rent reversions came in strongly at +14%, with Marina Bay Financial Centre Tower-3 (MBFC-3) being the key contributor for positive growth. Looking ahead, management guided for rent reversion at high single digits.

Rental Support Expiry to be Mitigated by Capital Distributions

  • With distribution of SGD2.7m rental support income in 1Q19, Keppel REIT has no further rental support income left.
  • Management plans to offset some of the near-term drop in income via higher capital distribution (it has an estimated SGD108m of capital gains available from past divestment gains).

Expecting Some Transition Period in ORQ

  • UBS, one of the key tenants at One Raffles Quay (ORQ) occupying ~230,000 sqf, recently announced that it will be vacating the space post its lease expiry at end-2020.
  • With the current strong momentum in the office leasing market, management expects strong demand for the space, but noted that there could be potential earnings impact of 3-9 month during the fit-in period of the new tenant.

311Spencer Street to Contribute From 2H20

  • Construction of 311 Spencer Street (311 SS, 50% stake) is on track for completion by 1H20 with earnings contributions kicking in immediately post completion. Keppel REIT has about AUD113m in progress payments that are still pending.

Results and Operations Review

1Q19 DPU down 2.1% YoY.

  • Keppel REIT's 1Q19 Revenue and NPI (100% basis) were marginally higher y-o-y, boosted to higher other income of SGD3m (1Q18: SGD0.7m). Other income was boosted by one-off income (compensation from early lease terminations and others) of SGD2.4m during the quarter. Rental support income was also higher 25% y-o-y at SGD2.7m.
  • Management also paid out SGD3m in capital distribution for the quarter to offset the impact of loss in income from divestment of the OFC stake. Overall, 1Q19 DPU came in-line accounting for 25% of our estimates.

Refinanced loans maturing in 2019.

  • Keppel REIT received commitments to refinance the remaining loans (~SGD211m post repayments and convertible bond issuance). All in, finance costs are expected to remain around current levels of 2.88% pa. 91% of debt is currently in fixed terms.

Portfolio occupancy improved slightly to 98.7% (4Q18: 98.4%).

  • Weighted average lease expiry (WALE) stood at ~5.7 years. Tenant retention rate for the quarter was 69%.

Active share buyback limits downside.

  • Since commencing in Jul 2018, Keppel REIT has bought back 34m shares in 2018, below book value (in the SGD1.10-1.20 price range), which have been cancelled.
  • Management sees share buyback as a good tool to bridge the share price discount to its NAV. Management plans to get a fresh buyback mandate in the upcoming AGM, which should allow it to buy back up to 1.5% of outstanding shares over six months.

Source: RHB Invest Research - 18 Apr 2019

Labels: Keppel Reit
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Suntec REIT - Heading Over to Orchard

Author: simonsg   |  Publish date: Thu, 18 Apr 2019, 9:53 AM

  • 9 Penang Road 100% pre-leased to UBS.
  • Long-term lease crystallises an estimated yield on cost in the low 4%.
  • Net positive despite UBS vacating space at One Raffles Quay and Suntec City office.
  • Maintain BUY, Target Price of S$2.12.

What’s New

Secures UBS as sole tenant for 9 Penang Road

  • Suntec REIT (SGX:T82U) and its JV partners announced that it has fully pre-leased 9 Penang Road to UBS, a global financial institution. This follows recent press reports that UBS was considering relocating to the property.
  • Suntec REIT revealed that UBS will be taking up 381,000 sqft of NLA with fit out expected to commence after TOP in 4Q19. UBS is expected to move into its new premises in 2H20.
  • The new UBS offices will house around 4,000 people with UBS’s operations at One Raffles Quay and Suntec City relocating to 9 Penang Road. We understand UBS currently occupies 230,000 sqft at ORQ and 90,000 sqft at Suntec Office or a total of 320,000 sqft.
  • The new property will also house the UBS University which provides training and development programmes for its employees across the region.
  • For the remaining 15,000 sqft of retail space at 9 Penang Road, discussions are ongoing with various specialty shops and food and beverage outlets. Suntec REIT expects to co-curate the retail tenant mix with UBS.
  • We understand UBS has signed a long lease in a mid-term rental review. While the exact length of the lease has not been disclosed, large anchor tenants in Singapore typically sign leases for 10 years or more.

9 Penang Road Development Overview

  • 9 Penang Road is a JV development between Suntec REIT (30%), SingHaiyi Group (SGX:5H0) (35%) and Haiyi Holdings (35%). Haiyi Holdings is a private vehicle of Gordon and Celine Tang who own a majority stake in SingHaiyi Group.
  • Total development cost is expected to be S$800m with the gross development value of the project assessed at S$940m (100% basis).
  • The 9 Penang Road building comprises eight floors of office space in two wings from levels 3-10, with the first floor designated for retail space, while the car parks are located in the basement and on the second floor.
  • It is located near the prime Orchard Road shopping belt and is directly opposite Plaza Singapura, a large shopping mall. The property is also a short walk away from the Dhoby Ghaut MRT station which is a major interchange with access to the North-South, North-East and Circle lines.

Our Thoughts

  • The news of UBS taking up the whole of 9 Penang Road is not surprising given prior guidance by Suntec REIT that it had received offers from prospective tenants wanting to take up the entire building and recent press reports. However, Suntec REIT was mulling then whether 9 Penang Road should be leased to a single tenant or multiple tenants and the risk/rewards under both options.
  • We believe this news is net positive for Suntec REIT as it removes some uncertainty over the ability of Suntec REIT to fill 9 Penang Road and crystallises an estimated development yield in the low 4% which is higher than the sub-and mid-3% yields for stabilised office assets in Singapore.
  • Suntec REIT will lose UBS as a tenant at Suntec City Tower 5 which it wholly owns and at ORQ which it owns a one-third stake with Keppel REIT (SGX:K71U) and Hongkong Land (SGX:H78). However, given the tight office market and 1-to-2-year lead time, Suntec REIT should be able to backfill the space vacated by UBS. The expected move into 9 Penang Road, accounting for the fit period which we understand is also close to the expiry of UBS's leases at ORQ and Suntec City in late 2020 and early 2021 respectively.
  • Finally, with 9 Penang Road now 100% pre-leased we believe this opens up the possibility for Suntec REIT to further deepen its exposure to Singapore by buying out its 70% JV partner. As part of the initial JV agreement, Suntec REIT and SingHaiyi Group/Haiyi Group have the option to acquire a wing in the development from the JV but with only a single tenant for the whole development, it may be more difficult though not impossible to split the agreement with UBS into two leases.
  • We believe while Suntec REIT is exploring acquisition opportunities in Australia, investors would be more supportive of buying assets in Singapore rather than Australia.
  • Given this positive development and Suntec REIT’s exposure to the expected multi-year upturn in Singapore office rents, we maintain our BUY call and Target Price of S$2.12.

Source: DBS Research - 18 Apr 2019

Labels: Suntec Reit
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Keppel REIT - Positioned to Score Goals

Author: simonsg   |  Publish date: Thu, 18 Apr 2019, 9:52 AM

  • Keppel REIT's 1Q19 DPU of 1.39 Scts (-2% y-o-y) in line with expectations. 
  • 14% positive rental reversion bodes well for expected upturn in DPU going forward. 
  • c.S$500m debt headroom provides upside risk to DPU estimates. 

Positioned to Score Goals

  • Leveraged to office upturn. We maintain our BUY call on Keppel REIT (SGX:K71U) with a revised Target Price of S$1.38. Keppel REIT’s share price typically leads a recovery in spot office rents by 6-12 months.
  • According to CBRE, Grade A CBD rents had risen by another 3% q-o-q to S$11.15 psf/mth by end-1Q19, and is 25% higher from the low of S$8.95 psf/mth in 1H17. Thus, we believe office rents are on a sustained upturn and the share price rally which started in late 2018 should continue.

Where We Differ –Discount to Book Unjustified

  • Consensus has a HOLD rating with a Target Price that implies Keppel REIT should trade at a discount to its book value. However, with FY18 likely to mark a cyclical low in Keppel REIT’s DPU, we are more forward looking and focus on growth in DPU from 2019 onwards which would be the first y-o-y increase in DPU in over five years with additional upside from potential deployment of S$500m debt headroom.
  • In addition, with management conducting a share buyback over the last few months, the first S-REIT to do so, this sends a strong signal that Keppel REIT is significantly undervalued, considering several office buildings in less prime locations have been sold at a cap rate of between 1.7-3.2%, below the 3.60-3.65% used to value Keppel REIT’s best-in-class Grade A buildings in Singapore.

Recovery in DPU and Positive Rental Reversions

  • We believe the expected recovery in DPU and delivery of positive rental reversions on the back of higher spot rents would be catalysts to narrow the discount to Keppel REIT’s book value of S$1.38.


  • After lowering our cost of debt assumption to 3.25% from 3.50%, we raised our DCF-based Target Price to S$1.38 from S$1.31.

Key Risks to Our View

  • Key risks to our positive view are weaker-than-expected rents sing DPU to come in below expectations.

What's New - Well Positioned

1Q19 DPU down 2% y-o-y

  • As expected 1Q19 DPU fell 2% y-o-y to 1.39 Scts largely on the back of loss of income from the sale of a 20% stake in Ocean Financial Centre (OFC) in 2018.
  • Stripping out the S$3m worth of capital distribution, underlying 1Q19 DPU would have come in at 1.30 Scts (down 9% y-o-y) which represented 25% of our FY19F underlying DPU, in line with our expectations.
  • Beyond the impact from the disposal of a partial stake in OFC, underlying DPU was also impacted by the depreciation of the AUD, albeit in constant currency terms, the Australian portfolio reported an increase in earnings. The softer headline results was also tempered by S$2.4m from one-off pre-termination income received over the quarter and impact from prior quarters’ positive rental reversions.
  • 1Q19 revenue and NPI were up 1% and flat y-o-y to S$40m and S$31.3m respectively, largely due to S$2.4m worth of one-off pre-termination income received. Adjusting for the minority interest in OFC, 1Q19 NPI would have fallen 13% y-o-y.
  • Overall portfolio occupancy remains high at 98.7%, a slight uptick from 98.4% at end-2018. Nevertheless, this is still down from 99.4% achieved in 1Q18, on the back of loss of tenant at ORQ in the middle of last year.

14% positive rental reversions

  • Over the quarter, Keppel REIT achieved signing rents of S$12.03 psf/mth (up from S$11.10 psf/mth for whole of FY18) and 14.4% rental reversions largely driven by leases at MBFC.
  • Going forward, Keppel REIT does not expect to sustain such high rental reversions but may deliver high single or low double digit rental reversions on the back of rising spot rents.
  • For the remainder of FY19 and FY20, only 3.2% and 8.9% of leases by committed attributable gross rent are up for renewal with another 0.4% and 3.2% of leases subject to rent reviews in FY19 and FY20.

Dip in gearing

  • Gearing fell to 35.7% from 36.3% in the previous quarter as Keppel REIT repaid some loans through working capital optimisation and part of the proceeds from the sale of a 20% interest in OFC.
  • Average interest cost inched up to 2.88% from 2.81% while the fixed proportion of debt rose to 91% from 85%.
  • Post balance date, Keppel REIT issued S$200m worth of 5- year convertible bonds (CBs) with coupon at 1.9%. This additional source of funds should realise interest savings of between S$1.5-2.0m compared to the use of conventional bank borrowings.
  • On the back of higher shares in issue, NAV per unit fell slightly to S$1.38 from S$1.40 at end 4Q18.

UBS exit from One Raffles Quay not as bad as it seems

  • UBS is expected to vacate 230k sqft of space at One Raffles Quay (OPQ) which is approximately 17% of the building at the end of 2020, when it moves to 9 Penang Road.
  • With sufficient lead time and a rising office market, Keppel REIT is confident of backfilling the vacant space. Thus far, it has received interest from potential tenants.
  • In addition, Keppel REIT is hopeful of achieving positive rental reversions when it signs new tenants for the space vacated by UBS.
  • However, we understand there may be some impact to cashflows in 1H21 as a fit-out period or rent free period may need to be offered to prospective tenants.

Pricing in more dovish interest rate outlook resulting in higher Target Price of S$1.38

  • As compared to earlier projections where our DBS economists were projecting the Federal Reserve to increase interest rates by four times in 2019 and an increase in the 10-year bond yield, they now assume no rate hikes and a flattish yield curve.
  • Thus, we have assumed 3.25% cost of debt versus 3.50% previously which leads us to raise our DCF-based Target Price to S$1.38 from S$1.31 previously. Our Target Price implies a P/Bk of 1.0x which we believe is fair considering we are in the midst of an upturn in the office rents.
  • Likewise, we have reduced our borrowing costs assumptions by 5-20bps which translates to 1-2% 9-21F DPU.

Potentially utilising S$500m debt headroom

  • Going forward, assuming gearing increases to 40%, we understand Keppel REIT has $500m worth of debt headroom (including S$200m worth of CBs).
  • We understand Keppel REIT is exploring acquisition opportunities in Singapore and Australia and potentially Korea and Japan.
  • While Keppel REIT’s share price has rallied significantly year to date, management is reluctant to raise equity to fund acquisitions as the stock continues to trade below book value.

Maintain BUY

  • With 1Q19 results in line with expectations, we maintain our BUY call, while raising our Target Price to S$1.38. 
  • Given upside risk to our DPU estimates from the potential deployment of its strong balance sheet and combined with the expected multi-year upturn in Singapore office rents, we retain our positive outlook for the stock.

Source: DBS Research - 18 Apr 2019

Labels: Keppel Reit
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Keppel-KBS US REIT - Benefits From Acquisition Flow Through

Author: simonsg   |  Publish date: Wed, 17 Apr 2019, 9:06 AM

  • Keppel-KBS US REIT's 1Q19 DPU of 1.50 UScts up 6% y-o-y in line after applying rights adjustment factor to 1Q18 DPU.
  • Boost from acquisition of Westpark portfolio in November 2018 and Maitland Promenade I in January 2019.
  • 10% positive rental reversions underpin growth in future income.
  • Maintain BUY, Target Price of US$0.80.

What’s New

Uplift from recent acquisitions

  • Keppel-KBS US REIT (SGX:CMOU) delivered 1Q19 DPU of 1.50 UScts which represented 25% of our FY19F DPU and was in line with expectations.
  • After applying the rights adjustment factor to 1Q18 DPU to account for the rights issue in late 2018, 1Q19 DPU was reported to be up 6% y-o-y as Keppel-KBS US REIT benefitted from earnings from the recent acquisition of Westpark portfolio and Maitland Promenade I in November 2018 and January 2019 respectively.
  • The two acquisitions and prior positive rental reversions translated into 1Q19 revenue and NPI both jumping 24% y-o-y to US$29.4m and US$18.2m respectively.

Healthy portfolio occupancy

  • Keppel-KBS US REIT's overall portfolio occupancy remains healthy at 92.1%, up from 91.6% at end-4Q18, driven by marginal increases across the portfolio.
  • The exception was Northridge Center in Atlanta which reported a decline in occupancy to 86.7% from 93.7% in 4Q18. The drop was largely expected due to a non-renewal of tenancy.
  • Due to the healthy demand-and-supply dynamics in Seattle (c.40% of the portfolio by cash rental income), occupancies for Keppel-KBS US REIT’s three key properties Bellevue Tech Center, The Plaza and Westpark portfolio were strong, inching up to 98.5% (98.1% in 4Q18), 94.2% (93.4% in 4Q18) and 97.8% (97.1% in 4Q18) respectively.

Strong rental reversions

  • Over the quarter, Keppel-KBS US REIT reported 10% positive rental reversions anchored by 13-16% increases from leases renewed at its Seattle properties.
  • Leases signed on average also had 3% per annum inbuilt rental escalations which are at the higher end of the typical 2-3% range.
  • Post the signing of 29 leases representing 203,000 sqft or 4.8% of the portfolio, another 6.4% and 14.9% of leases by cash rental income are up for renewal for the remainder of FY19 and FY20 respectively.
  • A large proportion of the leases that are set to expire for the rest of FY19, relate to the leases at Westpark portfolio, 1800 West Loop and West Loop 1 & II.

Uptick in gearing

  • Following the 100% debt-funded acquisition of Maitland Promenade I in January 2019, gearing rose to 38.1% from 35.1% at the end of 4Q18.
  • Due to the cost of debt in the low 4% related to the Maitland Promenade purchase, Keppel-KBS US REIT’s average cost of debt also rose to 3.76% from 3.53% previously.
  • Meanwhile, the proportion of fixed rate debt remains high at 76.8%.
  • On the back of higher units on issue, NAV per unit fell marginally to US$0.78 from US$0.80.

Maintain BUY, Target Price of US$0.80

  • We maintain our bullish stance on Keppel-KBS US REIT due to the positive outlook for the stock.
  • Specifically, Keppel-KBS US REIT has guided that it could achieve on average high single-digit rental reversions for leases due for renewal for the remainder of the year and CoStar (an independent property consultant) is forecasting 1-7% increase in spot rents across Keppel-KBS US REIT’s key markets.
  • The market has been extremely sceptical of the boost from the recent acquisitions following the disappointment over the rights issue conducted in late 2018. However, we believe with 1Q19 DPU rising 6% y-o-y, some of the market concerns should be allayed.
  • Thus, with Keppel-KBS US REIT trading at attractive valuations, 10% discount to book value during an office upturn and high 8.3% yield, it remains one of our top picks in the S-REIT market and we retain our BUY call with a Target Price of US$0.80.

Source: DBS Research - 17 Apr 2019

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Japan Foods - Ground Checks ~ Hototogisu Delivering Growth

Author: simonsg   |  Publish date: Wed, 17 Apr 2019, 9:05 AM

  • Stay NEUTRAL with SGD0.45 Target Price, 1% downside, 4.4% FY20F (Mar) yield.
  • We visited Japan Foods’ latest ramen franchise restaurant Hototogisu at Jewel Changi and came back positive about the brand’s potential to generate higher revenue per restaurant. See photos in attached PDF report.
  • Although the ongoing rationalisation of stores and moderating consumer discretionary spending amidst slowing economic growth should drag profits lower in FY19, contributions from new franchise brands and Japan Foods’ JV with Minor could translate into return of profit growth in FY20.

Hototogisu Continues to Register Strong Consumer Interest

  • JAPAN FOODS HOLDING LTD. (SGX:5OI) launched the Hototogisu franchise brand in Jun 2018, with its first outlet at Chijmes. Since then the group has launched three more outlets, one each at Great World City, Paragon and the latest one at Jewel Changi.
  • In our note: Japan Foods - RHB Invest 2018-08-29: Ground Checks At Its Latest Ramen Restaurant, we had estimated the brand to generate an average revenue per customer (RPC) of SGD24 during early months after launch of a new outlet. We believe that on a steady state, the brand could generate an average RPC of SGD18-19, which is still higher than the average RPC of SGD15 for Japan Foods’ flagship Ajisen Ramen brand.
  • With a higher number of customers visiting Hototogisu outlets each day, we believe the brand could generate SGD200,000-250,000 per month, which is higher than any other brand that Japan Foods manages.

New Brands Could Show Up at Funan

  • In Jan 2019, Japan Foods secured a new franchise brand, Afuri Ramen, which is known for its yuzu-flavoured broth. The group has also planned a new extension to rejuvenate its twenty-year-old flagship Ajisen Ramen brand. The extension will be named Kara- Men by Ajisen, and will offer different levels of spiciness for the broth.
  • We believe both brands could find a place at the new Funan Mall, which is expected to launch by end-2Q19.

Update on Its JV With Minor

  • In Dec 2018, Japan Foods announced a 50:50 JV with Minor Singapore (Minor), which will allow it to bring Minor’s Thai restaurants to Japan, while enabling the latter to expand Japan Foods’ brands in Thailand and China.
  • In Mar 2019, Japan Foods contributed SGD200,000 as its share of equity in the JV. Dining Collective, the JV company, is exploring opportunities to launch Minor’s restaurants in Japan and we believe it could open restaurants during 2H19.

Higher Than STI Yield Should Provide Price Support

  • We remain optimistic on Japan Foods’ ability to pay high dividends amidst a net cash balance of SGD22m (30% of its market cap) and quarterly FCF generation of SGD1m. Its FY20F-21F yield of 4.4-4.8% is higher than the STI’s forward yield of 4%. 

Source: RHB Invest Research - 17 Apr 2019

Labels: Japan Foods
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Frencken Group - Year of Industrial Automation

Author: simonsg   |  Publish date: Tue, 16 Apr 2019, 9:25 AM

  • Frencken Group Limited (SGX:E28) is a manufacturing solutions provider with a global presence and 2 key divisions – mechatronics and integrated manufacturing services (IMS). 
  • We project Frencken Group to have a net cash balance sheet by end-FY21F. We estimate dividend yields over FY19-21F of 4.1-4.3%. Initiate with ADD and Target Price of S$0.90.
  • We believe Frencken Group's earnings will be driven by industrial automation segment, where demand from a key customer is strong. 

Global Integrated Solutions Provider

  • Listed on the SGX Mainboard, Frencken Group Limited (SGX:E28) is a global integrated technology solutions company.
  • Frencken provides manufacturing solutions for companies in the automotive, healthcare, industrial, life sciences and semiconductor industries. Frencken is able to offer end-to-end solutions across the entire customer value chain - from product conceptualisation, integrated design, prototyping and new product introductions to supply chain design and management, volume manufacturing and logistics services.
  • Frencken has 3,500 employees located in 16 operating sites across Asia, Europe and the US.

Source: CGS-CIMB Research - 16 Apr 2019

Labels: Frencken
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