SINGAPORE (July 17): DBS Vickers Securities and CGS-CIMB Securities are maintaining their respective “buy” and “add” calls on Keppel REIT (K-REIT) with unchanged price target estimates of $1.41 and $1.34, after the REIT’s 2Q DPU of 1.42 cents came in within both research houses’ expectations.
In a Tuesday report, DBS analyst Mervyn Song says he remains positive on the REIT on the belief that office rents are on a sustained upturn, with K-REIT’s unit price expected to stage a rally following the correction in recent months.
Contrary to consensus suggestions that the REIT’s unit price should trade at a discount to book value considering its expected fall in FY18 DPU, Song has instead chosen to focus on projected DPU growth from 2019 onwards, which would mark the first y-o-y increase in DPU in over five years.
“With management announcing its intention to start a buyback, the first S-REIT to do so, this should send a strong signal that KREIT 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 3.75% used to value KREIT’s best in class Grade A buildings in Singapore,” says the analyst.
Similarly, CGS-CIMB analyst Lock Mun Yee is expecting further office rent recovery to continue driving K-REIT’s earnings growth on further rental reversions when its expiring leases are renewed.
With a remainder of 11.7% of leases due for renewal or review in FY18 and a further 11.8% in FY19, K-REIT is expected to see a y-o-y pick-up in spot rents by 15% for 2018F, which she believes should continue to underpin its DPU growth going forward.
Like DBS’s Song, Lock is positive on the manager’s intention to initiate its share buyback programme of the REIT as the move would suggest that its units are undervalued, in her view.
“Although its gearing is on the higher end of its comparable peers' range, we believe having 77% of its debt on fixed rates largely mitigates the near-term impact of rising interest rates. K-REIT estimates that a 50bp uptick in funding cost could erode its DPU by 0.1 cents,” she adds.
As at 9.50am, units of K-REIT are trading 1 cent higher at $1.15 or 30.6 times FY19F book, according to DBS estimates.
