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DBS increases Keppel REIT’s FY21 DPU estimate as it kick-starts 'acquisition mode'

Felicia Tan
Felicia Tan • 3 min read
DBS increases Keppel REIT’s FY21 DPU estimate as it kick-starts 'acquisition mode'
The analysts estimate underlying DPU for FY21 to increase 13% y-o-y.
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DBS Group Research analysts Rachel Tan and Derek Tan are positive on Keppel REIT’s “kick-starting acquisition mode” to drive its underlying distribution per unit (DPU) growth.

The analysts have maintained their “buy” call on Keppel REIT with an increased target price of $1.40 from $1.35 previously to factor in the acquisition of Pinnacle Office Park in Sydney’s Macquarie Park on Sept 13, and some interest savings from a lower average cost of borrowing.

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

According to the analysts, this is probably the first asset acquisition made among the nonindustrial and logistics REITs since the Covid-19 pandemic started.

“The long-awaited redeployment of capital post a series of divestments in the past few years will drive underlying DPU growth with the accretive acquisition and embedded rental escalations. Based on pro-forma FY19 numbers, underlying DPU accretion is estimated to be around 4%,” they write in a report dated Oct 2.

“Based on our estimates, underlying FY21F DPU is estimated to grow by 13% post-acquisition partly driven by the acquisition, low base in FY20F and some interest savings from the low interest rate environment,” they add.

While Keppel REIT continues to have ample capital distributions of $467 million as at 2Q20 which will help maintain a steady and sustainable DPU, the acquisition reduces the reliance on capital distributions with growth in underlying DPU, note the analysts.

This will also allow the REIT room for more acquisitions, they add.

Following the merger between CapitaLand Mall Trust (CMT) and CapitaLand Commercial Trust (CCT), Keppel REIT would be the only pure-office REIT, a valued trait that investors have “yet to appreciate”.

“We believe KREIT's best-in-class office portfolio, anchored by Singapore Grade A offices in prime CBD locations, is well-positioned to benefit from a potential recovery in a very tight net supply market. Valuation remains attractive at 0.8x price per net asset value (P/NAV), below the sector’s historical mean,” they say.

The analysts also believe that the REIT’s low expiring rents will provide a buffer to weather a decline in rental income.

They also note that the REIT could do better under a more optimal shareholding structure.

Keppel REIT, which is currently trading at a lower velocity compared to its large-cap S-REIT peers, can match its peers if its sponsor, Keppel Land, considers paring down its stake to a more “optimal 30-35% level”, similar to its peers, they say.

“We believe that the boost in liquidity and K-REIT’s position as a pure-play office play post-CCT-CMT merger, will drive a re-rating in share price towards its NAV over time, in line with an improvement in earnings,” they add.

As at 3.48pm, units in Keppel REIT are trading 1 cent higher, or 0.9% up, at $1.09.

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