Brokers' take: UOBKH raises TP for Keppel Reit to S$1.52 on higher DPU estimates

UOB Kay Hian (UOBKH) raised its target price for Keppel Reit K71U to S$1.52 from S$1.25 previously, as it increased its distribution per unit (DPU) estimates for the real estate investment trust (Reit) following its agreement to acquire a Grade A freehold office building in Sydney, Australia.

Units of the Reit were trading flat at S$1.11 as at 9.59 am on Wednesday (Dec 1).

It had announced on Tuesday (Nov 30) that it will acquire and develop the property, Blue & William, for A$327.7 million (S$322.2 million).

Upon practical completion of the property, Keppel Reit's assets under management will grow to S$9 billion across 11 properties in Singapore, Australia and South Korea.

Assuming the transaction was completed on Jan 1, the FY2020 DPU after the transaction would be 5.90 Singapore cents, from 5.73 cents before, according to pro forma estimates.

In a research note on Wednesday, analyst Jonathan Koh maintained "buy" on the stock, while raising his DPU forecast for 2022 and 2023 by 1.8 per cent and 2.5 per cent respectively, taking in the expected contributions from Blue & William.

Additionally, Koh believes that a merger of Keppel Reit and SPH Reit is now less likely given that Keppel's final offer for Singapore Press Holdings (SPH) fell short of Cuscaden Peak's improved offer of S$2.40 per share.

Therefore, he has gone back to using a lower cost of equity at 5.5 per cent in his valuation of Keppel Reit, saying that the Reit is "likely to maintain its status and the attached premium as a pure play on office".