SINGAPORE (Oct 19): Analysts are divided over Keppel REIT after a mixed bag of results in 3Q17.
In the third quarter ended September, distribution per unit (DPU) fell 13% year-on-year, largely due to lower associate income, lower rent support, and the absence of divestment gains.
Net property income for the quarter edged up 0.3% to $31.7 million in 3Q17, on the back of higher contribution from Bugis Junction Towers, 275 George Street and 8 Exhibition Street.
See: Keppel REIT 3Q DPU falls 12.5% to 1.4 cents on lower share of results of associates
In a report on Tuesday, CIMB Research analyst Lock Mun Yee describes it as an “uneventful quarter” for Keppel REIT.
While Lock says the 3Q DPU was slightly below CIMB’s expectation at 22% of full-year forecast, she notes that it was in line with Bloomberg consensus’ expectations.
“We expect KREIT’s earnings to remain stable quarter-on-quarter,” Lock adds.
CIMB is keeping its “hold” call on Keppel REIT. It has raised its target price to $1.20, from $1.16 previously, as a result of a slight tweak in its cost of equity assumption to match other Singapore REITs with Australian exposure.
However, RHB Research analyst Vijay Natarajan draws attention to negative rental reversions of close to 10% during 3Q17.
“The sharp negative rent reversions came in despite an uptick in the overall Grade-A office rents, which is a cause for concern,” Natarajan says.
According to Natarajan, commercial real estate services firm CBRE Group had estimated a 2% q-o-q growth for Grade A office rents in 3Q17.
“The negative rent reversions also highlight management’s leasing strategy of maintaining occupancy amidst a huge in-coming supply,” he adds.
In this light, RHB says it is currently reviewing its recommendation and target price for Keppel REIT. The research house had a “neutral” rating on KREIT with a target price of $1.05.
“While we expect rents in the Singapore office sector to bottom out this year and rebound by 5-10% in 2018F, we believe the positives are already reflected in the share price,” Natarajan says.
Over at DBS Group Research, however, lead analyst Mervin Song believes there is still room for better times ahead for KREIT.
“The rally in KREIT’s share price can be sustained despite over 30% increase over the past 18 months,” Song says. “With Grade A CBD rents increasing for the first time in 10 quarters according to CBRE, we believe we are on the cusp of an upturn.”
DBS is keeping its “buy” call on Keppel REIT and raising its target price to $1.28, from $1.23 previously.
“While acknowledging that KREIT’s DPU will likely remain flat over the coming couple of years and is supported by capital distributions, there remains upside to KREIT’s share price,” Song says.
Going into 4Q17, Song expects KREIT to distribute around $3 million in capital gains to temper the decline in DPU.
In addition, he opines that the implied price per sq ft for Keppel REIT’s Singapore portfolio, which stands at close to $2,550, remains below that of recent market transactions of between $2,700 and $3,500 psf.
“We believe the implied close to $2,550 psf for KREIT’s Singapore portfolio and close to 15% discount to book value is too wide for a best-in-class office portfolio,” Song says.
As at 12.52pm, units in Keppel REIT are trading 1.5 cents lower at $1.18. According to DBS, this implies an estimated price-to-earnings ratio of 31 times and distribution yield of 4.7% for FY2017.
