Brokers' take: Analysts mixed on Keppel Reit as H2 DPU drops 1.7%

ANALYSTS are mixed on Keppel Reit (KReit) after the real estate investment trust (Reit) reported a lower than expected H2 FY2021 distribution per unit (DPU) of S$0.0288 on Tuesday (Jan 26), down 1.7 per cent from H2 FY2020.

Following KReit's results announcement, analysts from Jefferies and RHB maintained their "buy" calls, and Maybank retained its "hold" call on the Reit. Jefferies lowered its target price to S$1.33 from S$1.35 while RHB and Maybank raised their target prices to S$1.29 from S$1.24 and S$1.05 from S$1, respectively.

In a report on Wednesday, equity analyst Krishna Guha from Jefferies said the return to office and limited supply can pick up KReit's leasing momentum. He highlighted the attractiveness of KReit's office portfolio in Singapore, Australia and Korea.

The analyst also noted that capital top-ups, such as the acquisition of Keppel Bay Tower, can provide support to the DPU and deliver the intended returns.

Cap rates of the Reit continue to be stable despite the upward bias of discount rates and this will support asset values, Guha added. With KReit's improved environmental, social and governance (ESG) targets, the equity analyst thinks that ESG-focused investors would be more attracted as well.

However, Guha lowered the target price to factor in the higher cost of equity of 6.7 per cent. This comes with the increase in gearing to 38.4 per cent, 1 percentage point higher than the previous quarter.

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Meanwhile, RHB analyst Vijay Natarajan noted that the higher target price is attributed to the Reit's sharpened ESG focus to reduce emissions, and energy and water usage.

Based on RHB's methodology, the analyst derived an ESG score of 3.2 out of 4, and applied a 4 per cent premium to the intrinsic value to derive the new target price.

Natarajan remains positive on the Reit's leasing demand, as well as its expansionary demand from technology, consumer and family offices setting up. He noted the drop in occupancy rates but attributed it as transitory, and said that leasing interest is "healthy" for vacant space.

He highlighted his positive sentiments towards the Reit's acquisition of Blue & William, a Grade A office building under development in North Sydney for AUD327.7 million (S$315.4 million). The deal will provide KReit with a 4.5 per cent coupon for the progressive payments made during the construction phase, which Natarajan says is the "key attraction".

"Management remains upbeat on leasing demand, with momentum improving since early this year. Its balance sheet remains in good shape, to weather interest rate hikes, with room for organic and inorganic growth. Valuation is attractive, at a 12 per cent discount to book value," Natarajan added.

Maybank analyst Chua Su Tye expects Singapore's Grade A office rentals to increase by 7 per cent year on year in FY2022, and believes rental reversion will be positive.

While KReit posted a fall in occupancy rates in Australia, the analyst anticipates a stronger demand recovery and rental growth prospects for Australia's office sub-markets due to lockdown eases.

With the Reit's growth in gearing, Chua also predicts assets under management to grow in its core markets, with the ease of valuations for assets in Australia because of higher leasing risks.

However, Chua is of the opinion that "DPU growth remains unexciting versus peers, as upside from rental recovery is dulled by rising interest costs".

Units of Keppel Reit ended flat at S$1.16 on Wednesday (Jan 26).