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Analysts maintain their estimates on Keppel REIT following 'another stable quarter'

Felicia Tan
Felicia Tan • 4 min read
Analysts maintain their estimates on Keppel REIT following 'another stable quarter'
The analysts at DBS have maintained their "buy" call while RHB's analyst has also maintained his "neutral" recommendation.
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Analysts from CGS-CIMB, DBS Group Research and UOB Kay Hian have maintained their “add” or “buy” calls on Keppel REIT following the REIT’s results.

On Oct 19, Keppel REIT posted a 4.6% growth y-o-y in its distributable income to $47.6 million for 3QFY2020 ended Sept 30.

See: Keppel REIT’s 3Q distributable income from operations rose 4.6% to $47.6 mil

While there was no dividend declared due to the REIT’s adoption of half-yearly distribution, the analysts say that Keppel REIT’s implied distribution per unit (DPU) for 3QFY2020 (ex capital distributions) is equivalent to around 1.4 cents.

The REIT will announce its capital distribution with its 2HFY2020 results later in the year.

CGS-CIMB’s Lock Mun Yee and Eing Kar Mei have maintained their target price of $1.25, while increasing their FY2020 DPU estimate for the REIT by 0.64%. They have, however, lowered their DPU estimates for FY2022-2023 by 1.21-1.28% to factor in the “higher-than-expected quantum of perpetual security issuance”.

“Our dividend discount model (DDM)-based target price (TP) remains unchanged at $1.25 as we roll over our DDM assumptions into FY2021F,” they explain.

“Potential catalysts include the redeployment of divestment proceeds into new accretive acquisitions and a better-than-projected office rental market, while downside risks include longer-than-expected frictional vacancy from tenant movements due to a slowdown in demand for office space,” they add.

DBS Group Research analysts Rachel Tan and Derek Tan have also kept their target price of $1.40 on Keppel REIT.

The analysts are buoyant on Keppel REIT’s pure-office portfolio, which is anchored by Singapore Grade A offices in prime central business district (CBD) locations, as it positions the REIT well to benefit from a potential recovery, and to capture the expansion in the tech sector in a “very tight net supply market”.

“In addition, Keppel REIT is set for inorganic growth with more than $2 billion of potential sponsor pipeline which could be accelerated given Keppel Corporation’s plan to unlock asset value,” they say.

Similarly, UOB Kay Hian’s Jonathan Koh and Loke Peihao have maintained their target price of $1.40. They have also kept their earnings forecast for the REIT.

For the 3QFY2020, Keppel REIT’s results have come in line with Koh and Loke’s expectations. The analysts are also positive on the REIT’s resilient Singapore and Australia portfolio.

To that end, the analysts have identified the REIT’s positive rental reversion for office properties in Singapore and contributions from 311 Spencer Street in Melbourne, as share price catalysts.

RHB analyst Vijay Natarajan, on the other hand, has also maintained his “neutral” call, with a higher target price of $1.14 from $1.10 previously.

In the release of its 3QFY2020 results, the manager of the REIT noted that its office leasing demand surpassed expectations with strong double-digit rent reversions at 15% for the quarter, despite Covid-19.

“Keppel REIT has been pivoting towards rental stability with recent Australian acquisitions offering long weighted average lease expiry. One concern, however, is the anticipated downsizing by financial institution tenants (36% of total) in the medium term,” he notes.

Natajaran has also identified Keppel Bay Tower as a potential near-term acquisition target for the REIT, if its sponsor chooses to divest.

The acquisition, he says, will depend on pricing and DPU accretion.

On Sept 13, the REIT announced the acquisition of Pinnacle Office Park – a Grade-A commercial building in Sydney, Australia – for A$306 million ($303.3 million), which is expected to be completed in 4Q2020.

See also: Keppel REIT buying Pinnacle Office Park in Sydney for $303.3 million

“Gearing post acquisition stands comfortable at 36.9% providing over $500 million of debt headroom for future acquisitions (assuming 40% as a comfortable level). All-in interest costs have also come down by 43bps to 2.39% pa, aided by lower interest rates. KREIT also has over $50 million in capital gains, which can be used to smoothen out distribution and potential share buybacks,” he says.

Natarajan has also maintained his earnings estimates for the REIT.

As at 4.02pm, units in Keppel REIT are trading 1 cent lower or 0.9% down at $1.05.

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