RHB Group Research has upgraded Keppel REIT to “buy” with an unchanged target price of $1.20, as it sees value emerging at its current levels.

As at the time of writing on Sept 1, the REIT is trading at 0.8 times price-to-book value (P/BV), says analyst Vijay Natarajan.

The REIT’s assets – comprising high quality Grade-A offices – are expected to benefit from the re-opening of Singapore’s economy.

Furthermore, its sharpened focus on environmental, social and governance (ESG) principles also places it in a positive position to ride the sustainability wave, adds the analyst.

The REIT also has the potential to grow via Keppel Corporation’s merger with Singapore Press Holdings (SPH).

“Assuming Keppel’s acquisition of SPH is successful, we see medium term possibility of SPH REIT merging with Keppel REIT [within one to three years]. While such a move is beneficial in terms of scale and diversification, the key considerations for Keppel REIT will likely be pricing and post Covid-19 outlook for retail sector,” he writes.

Despite the pandemic, Keppel REIT’s income profile has also been improving since 2020. During the 1HFY2021 ended June, the REIT reported 12.5% y-o-y growth in distribution per unit (DPU) of 4.924 cents. The REIT’s DPU is expected to grow steadily at a compound annual growth rate (CAGR) of 3% from FY2020 to FY2024.

Keppel REIT’s rental reversions also remained strong in mid- to high single digits, a trend Natarajan expects to continue.

“Keppel REIT’s balance sheet also remains in good shape with gearing expected to lower to [around] 37% post proposed sale of 275 George Street in Brisbane presenting a good headroom for further acquisitions,” he writes.

That said, the REIT’s share price has fallen some 13% over the last month, more than the 3% overall decrease in the Singapore REITs (S-REITs) sector.

The selldown, according to Natarajan, may be mainly due to investors’ concern over the proposed paring down of Keppel Corporation’s stake to 20% from 46%. The recent management changes have also caused some concern among the REIT’s investors.

Despite the short-term selling pressure, however, Natarajan remains optimistic on the REIT’s long-term fundamentals.

Units in Keppel REIT closed 2 cents higher or 1.91% up at $1.07 on Sept 1, with an FY2021 P/B of 0.82 times and dividend yield of 5.7%.

Photo: Keppel REIT