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Analysts largely positive on Keppel REIT on likely recovery of office sector

·4-min read

DBS, Maybank and RHB have given the REIT target prices of $1.40, $1.05 and $1.29 respectively.

Analysts from DBS Group Research, Maybank Securities and RHB Group Research are mostly positive on Keppel REIT after it posted its results for the FY2021 on Jan 25.

For the FY2021 ended December, Keppel REIT reported a distribution per unit (DPU) of 5.82 cents, up 1.6% y-o-y. In the 2HFY2021, the REIT’s DPU fell 1.7% y-o-y to 2.88 cents.

The higher total FY distribution is attributed to accretive acquisitions made in Melbourne and Sydney, as well as Singapore’s Keppel Bay Tower.

On the back of the REIT’s results, DBS analysts Rachel Tan and Derek Tan have kept “buy” as the REIT’s full-year DPU stood in line with their estimates.

The analysts have also kept their target price unchanged at $1.40.

The way they see it, the REIT’s best-in-class office portfolio is well-positioned to benefit from a potential recovery in a “tight net supply market”.

Keppel REIT, which is the only Singapore REIT (S-REIT) left with an office pure play, has a portfolio of Grade A offices in Singapore’s prime central business district (CBD).

As such, the analysts from DBS believe “investors will eventually favour and assign a premium to its unique attribute”.

To them, the REIT’s valuation remains attractive at an FY2022 yield of 5.2% and a price-net asset value (P/NAV) of 0.9 times, which is close to the sector’s historical mean.

Furthermore, Keppel REIT has been active in churning its assets to optimize and grow its portfolio, a move which will drive inorganic growth, say the analysts.

To this end, the analysts see the REIT’s shareholding structure as optimal compared to its large-cap peers.

“Keppel REIT trades at a lower velocity compared to its other large-cap S-REITs, which we believe can be addressed if the sponsor considers paring down its stake to a more optimal 30%-35% level, similar to other large-cap S-REITs,” they write.

Maybank Securities analyst Chua Su Tye has maintained “hold” on Keppel REIT as its results stood in line with his expectations for the FY2021.

He has, however, upped his target price to $1.05, 5% higher than his previous target price of $1.

That said, Chua sees the REIT’s DPU growth as “unexciting” compared to its peers despite the tailwinds in office demand. According to him in his Jan 26 report, the unexciting DPU growth is due to the rising interest costs, which mitigated any upside from rental recovery.

While Chua sees positive prospects on the REIT on the back of stronger rental recovery for Singapore’s Grade A offices and stronger demand recovery and rental growth prospects in its Australia portfolio, his preference still lies with CapitaLand Integrated Commercial Trust (CICT) as a proxy for the reopening trade.

Catalysts for CICT include DPU recovery and redevelopment upside, says Chua.

That said, he estimates the REIT’s operating DPU to rise in FY2022 to FY2022 with the completion of catalysts from DPU recovery, and redevelopment upside.

Office vacancies are also estimated to rise to 5% to 10% on the back of “weak demand and downsizing trends, with rental reversions to moderate in 2021”, says Chua.

Finally, RHB Group Research analyst Vijay Natarajan has kept “buy” on Keppel REIT with a new target price of $1.29 from $1.24 previously, as he sees the recovery of the office sector on the cards.

That said Keppel REIT’s DPU for the FY2021 fell slightly below expectations at 97% of his full-year estimates due to the “transitory vacancy in a few of its office assets”. However, the REIT’s management says it remains upbeat on leasing demand in FY2022.

Natarajan is also positive on the REIT as its balance sheet remains in good shape, which will enable it to weather interest rate hikes, with room for organic and inorganic growth.

Like the analysts at DBS, Natarajan also sees the REIT’s valuation as attractive at a 12% discount to book value.

As at 2.39pm, units in Keppel REIT are trading flat at $1.16, or an FY2022 P/B of 0.88 times and dividend yield of 5.2%, according to RHB’s estimates.

Photo: Keppel REIT

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