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Analysts keep estimates on Keppel REIT after its 1QFY2024 update stood within expectations

Felicia Tan
Felicia Tan • 4 min read
Analysts keep estimates on Keppel REIT after its 1QFY2024 update stood within expectations
2 Blue Street, formerly Blue & William. Photo: KREIT
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Analysts from CGS International, Maybank Securities, RHB Bank Singapore and UOB Kay Hian have all kept their “add” and “buy” calls on Keppel REIT after the REIT’s business update for the 1QFY2024 ended March 31 stood within their expectations.

During the 1QFY2024, Keppel REIT’s distributable income stood flat y-o-y at $55.2 million. The figure accounted for 24% of CGS’s Lock Mun Yee and Natalie Ong’s full-year expectations.

The analysts’ report dated April 23 also highlight Keppel REIT’s positive rental reversion and robust leasing interest for its spec suites at Pinnacle Office Park in Australia. The analysts are also expecting the acquisition of the 50% stake in 255 George Street to boost the REIT’s contributions upon its completion in the 2QFY2024.

Lock and Ong have kept their distribution per unit (DPU) estimates unchanged for the FY2024 to FY2026. Their target price also remains the same at $1.15.

“Potential catalysts include the redeployment of divestment proceeds to new accretive acquisitions and recovery to pre-Covid demand for office space. Downside risks include longer-than-expected frictional vacancy from tenant movements due to a slower-than-expected backfilling of office space, and reduced appetite for its office space due to a hybrid work environment,” they write.

Maybank Securities Krishna Guha has also kept his estimates and unchanged target price of $1.

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“With operations and financials broadly in-line with our forecast, we leave our estimates unchanged,” he writes.

While he notes the “flight to prime” trend from Keppel REIT’s update, he also recognises that the REIT’s top-line growth was eroded by higher funding costs.

To him, the REIT’s rising gearing and upcoming lease renewals may remain a concern, but its quality portfolio and discounted valuation at 6.8% its FY2024 yield and 0.7 times P/B is still a “buy”, in his view.

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RHB analyst Vijay Natarajan has maintained his estimates. The analyst has also kept his target price unchanged at $1.08 as the REIT’s metrics stood in line with his expectations.

“Operationally, its portfolio continues to show strength despite market concerns over the office sector with stronger-than-expected double-digit rent reversions and stable occupancy,” says Natarajan in his April 23 report.

“The latest yield-accretive acquisition of an Australian asset is opportunistic, and likely to be funded by proceeds from divestments – keeping gearing below 40% levels,” he adds.

The REIT, which is trading at a “hefty” discount of over 35% to book value presents a “good medium-term buying opportunity”.

Citi Research analyst Brandon Lee has kept his “neutral” call on Keppel REIT, the only brokerage to do so. That said, his target price remains at an unchanged 90 cents.

“Keppel REIT’s 1QFY2024 key business and operational updates illustrated the resilience of Singapore’s office sector (especially Grade A which accounts for [around] 70% of Keppel REIT’s assets under management or AUM), with double-digit rent reversions and stable occupancies,” Lee notes in his April 24 (Singapore time) report.

“Given FY2024/FY2025 expiring rents of $11.01/$11.13 per sq ft at [around] 8%/7% below spot rent of $11.95 per sq ft, we are not surprised at Keppel REIT’s upward revision in FY2024 reversions, with the 104% y-o-y surge in new committed leases also a positive surprise,” he adds.

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Though Keppel REIT has outperformed the larger Singapore REIT (S-REIT) sector with a 9% unit price decline year-to-date (ytd) compared to the sector’s 14% decline, Lee remains “neutral” on valuations.

However, the analyst sees two key catalysts to the REIT’s unit price, which is the divestment of T Tower at higher-than-expected valuations and the return of share buybacks. Keppel REIT bought back 19.7 million of shares – or 0.5% of its share base – for $17.2 million or 88 cents per share between March to June 2023.

Following the REIT’s results, the analyst sees that there will be a “slightly positive” impact on its unit price on upward revision in rent reversions.

UOB Kay Hian analyst Jonathan Koh has lowered his target price on Keppel REIT to $1.20 from $1.26 previously, even though he continues to like the REIT for its "attractive" valuation of 0.66 times its price-to-net asset value (P/NAV) and at a 34% discount to its NAV per unit of $1.29. "[This] is near the low of 0.61 times on March 23, 2020, at the onset of the Covid-19 pandemic," he says.

While Koh recognises that the REIT showed a "resilient performance" with its Singapore and Australia portfolios generating positive rental reversions and a largely stable occupancy rate in Singapore among other factors, the analyst has trimmed his FY2024 DPU forecast by 4%. This comes after factoring in a progressive backfilling of vacant space at 8 Exhibition Street and the possibility of higher-for-longer interest rates in the 2HFY2024.

As at 4.13pm, units in Keppel REIT are trading 0.5 cents higher or 0.58% up at 87 cents.

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