Brokers’ take: RHB cuts Kore’s target price on lower DPU forecast
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Mia Pei
RHB Research has lowered its target price for Keppel Pacific Oak US Reit (Kore) to US$0.56 from US$0.64, after trimming its near-term distribution per unit (DPU) forecasts.
This comes after the office-focused real estate investment trust (Reit) announced its financial results for the first half of the fiscal year, which are broadly in line with RHB’s expectations.
The research house has lowered Kore’s DPU forecasts for FY2023 and FY2024 by 6 per cent and 7 per cent, respectively, to account for a lower occupancy rate and higher financing costs.
RHB, nonetheless, maintained its “buy” call on the Reit in favour of its modest gearing level at 38.4 per cent, which is well below the official limit of 50 per cent, and provides a buffer against a decline in valuation amid market uncertainties.
The research house also noted that Kore has withstood the general market challenges in the US commercial sector with its differentiated portfolio.
“A 10 per cent to 15 per cent decline in (Kore’s) valuation would still keep its gearing at 42 per cent to 45 per cent,” said analyst Vijay Natarajan in a note on Thursday (Jul 27).
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In addition, he favours Kore for its relatively safe debt profile, where 77.6 per cent of its debt is hedged using interest rate swaps with maturities mostly tied closer to loan expiries, on top of no major debt to mature in the near term.
Key risks to Kore’s operations, however, still lie on interest rate hikes in a weakening US economy, as well as structural changes that may reduce demand for office space, said the analyst.
He also said that Kore’s environmental, social and corporate governance (ESG) score of 3.1 out of 4 is “a notch above the country median score”.
“So we applied a 2 per cent ESG premium to its intrinsic value to derive our target price.”
Kore units were trading up 10 per cent, or S$0.03, to S$0.33 as at 1.19 pm on Thursday.
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