Highlights

Keppel REIT - a Mixed Bag; Stay NEUTRAL

Date: 16/07/2019

Source  :  RHB
Stock  :  Keppel Reit       Price Target  :  1.20      |      Price Call  :  HOLD
        Last Price  :  1.22      |      Upside/Downside  :  -0.02 (1.64%)
 


  • Maintain NEUTRAL, Target Price revised to SGD1.20 from SGD1.12, 5% downside.
  • KEPPEL REIT (SGX:K71U)’s 2Q19 results are in line. Key positives ahead are strong rental growth potential and acquisition contributions, offset by downtime from tenant movements and absence of rental support.
  • Valuations are fair, with FY19F yield of 4.4% (P/BV of 0.9x). We cut COE by 20bps to 7% to better reflect the prolonged low interest rate environment – which resulted in our higher Target Price.

Room for Organic Rental Rate Growth to Offset Lack of Income Support

  • About 272,900 sqf (attributable ~112,600 sqf) of leases were signed in 1H19, with rental reversions coming in strongly at +15%.
  • With average expiring rents for 2H19/2H20/2H21 expiring leases being at SGD10.70/9.70/9.60 psf (10-20% below current signing rates), we see good room for rental growth ahead. This, in our view, should help offset the absence of rental income support (~SGD8.6m for 2018) which were fully utilised by 1Q19.

Downtime Tenant

  • UBS One Raffles Quay (ORQ), will be vacating the space to see strong demand for the space, considering the current market momentum – but there is likely to be an earnings void of ~3-6 months during the transition period.
  • Similarly, HSBC Bay Financial Centre (MBFC) in May 2020, with the fit-out period commencing in 4Q19.
  • Separately, Deutsche Bank, which has announced major restructuring plans for its Asia-Pacific operations, occupies ~200,000sqf at ORQ. Under the current lease term (which extends until 2025), management noted that the tenant will not be able to return the office space, but can potentially sub-lease some of its existing space.

Maiden Tower, 311SS to Contribute From 2H20 Onwards

  • During 2Q, Keppel REIT completed the acquisition of T Tower in Seoul which contributed SGD1.3m for the quarter. The asset was acquired at an initial NPI yield of 4.7%.
  • Construction of 311 Spencer Street (311 SS, 50% stake) is on track for completion by 1H20, with earnings contributions expected to kick in from 2H20 onwards.

Share Buybacks Limit

  • Keppel REIT plans to continue its unit buy-back programme, as management still undervalued. During 2Q, it purchased and cancelled SGD1.26 unit.

DPU and Target Price Adjustments

  • We revise FY19-21F DPU by 1%/-1%/2%, after on and occupancy changes.

Source: RHB Invest Research - 16 Jul 2019

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Labels: Keppel Reit

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Keppel Reit 1.22 +0.02 (1.67%) 8,334 

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