Brokers' take: Maybank upgrades Keppel Reit to 'buy' on office demand tailwinds

MAYBANK Securities on Thursday (Apr 21) upgraded Keppel Reit to "buy" from "hold" as rising office demand strengthens the real estate investment trust’s fundamentals.

Maybank has raised its distribution per unit (DPU) estimates on the Reit by 3-5 per cent on the back of improving occupancy and accelerating rents. Meanwhile, RHB has increased its FY2023-23 DPU estimates by 1-2 per cent.

Both research teams have increased their target prices on the counter.

Maybank raised its target to S$1.30 from S$1.20, implying a potential upside of 7.4 per cent from Keppel Reit's last trading price of S$1.21 as at 3.29 pm on Thursday. The counter was trading 1.7 per cent or S$0.02 higher at the time.

Maybank sees a “favourable risk-reward” with an FY2022 dividend yield of 5.1 per cent and a 2-year DPU compound annual growth rate of 3.5 per cent. It also noted that DPU and any downtime are cushioned by more than S$500 million in capital distributions. 

Meanwhile, RHB raised its target to S$1.31 from S$1.29, implying a potential upside of 8.3 per cent. It maintained its "buy" call on the Reit.

Keppel Reit’s Q1 results had met RHB’s expectations, and valuations are attractive with a price to book value of 0.9 times, compared with the sector norm of 1.1 times.

On Wednesday, Keppel Reit posted a 4.3 per cent increase in its first-quarter distributable income from operations to S$53.8 million, from S$51.6 million a year earlier.

The Reit’s manager had attributed the increase in distributable income mainly to the acquisition of Keppel Bay Tower in May last year, partially offset by the impact of its 275 George Street divestment in Brisbane, Australia last July.

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Keppel Reit Q1 distributable income up 4.3% to S$53.8m

Both research teams note limited downside from interest rate and cost sensitivities, including the impact from rising utility charges, which are hedged. This is because Keppel Reit’s manager increased its fixed-rate loans, RHB said.

Any potential acquisitions or any divestment could likely come from the Australian market, RHB noted. The Reit's aggregate leverage as at Mar 31, 2022 stood at 38.7 per cent, well below the leverage limit of 50 per cent imposed by the Monetary Authority of Singapore (MAS).

Maybank estimated about S$1.5 billion in debt headroom for Keppel Reit. Although the research team expects Keppel Reit's manager to eye growth in assets under management, deal visibility will likely be low amid interest rate volatility.