Tuesday, October 8, 2013

Keppel-REIT : Still relatively cautious (Nomura)

Target price Reduced from 1.23 - SGD 1.21
Closing price September 27, 2013 SGD 1.23
Still relatively cautious

Action: Upgrade to Neutral on valuation but still relatively cautious
KREIT has marginally outperformed the other REITs year to date (-5%, vs. FSTREI’s -5.6%) but our numbers suggest its cost of debt could rise significantly in the long run, especially if the currency mix of assets and debts is matched (4.5% vs. current 2.2%). Assuming the higher cost of debt and all management fees to be paid in cash would shave 2.8pp off FY15F yield, on our estimates. Compared to the long-term average risk free rate of 2.9%, valuation remains unattractive though more fairly valued after the recent correction, in our view, and hence the upgrade to Neutral.

Catalyst: Focus now on capital management
With a further increase in gearing to 44% (from 43%) as of end-June on account of the latest acquisition in Australia, we believe KREIT’s management’s focus will now be on capital management. The lower cost of AUD borrowings provides an opportunity for the manager to address the asset-liability currency mismatch, in our view.

Valuation: TP cut marginally to SGD1.21
We cut our TP marginally to SGD1.21 (from SGD1.23) on account of a higher ascribed FY14F yield spread of 4pp (from 3.9pp) and lower FY14F DPU (7.5Scts from 7.7Scts, following the recent placement of new units). As a cross-check, our current TP translates into a P/B multiple of 0.9x based on end-June book value of SGD1.27, which is a premium to the average multiple of 0.8x KREIT has traded at since 2006. Considering the improved trading liquidity, we believe the premium could be justified. Our TP of SGD1.21 implies a potential total return of 4.5% (potential downside of 1.6% + FY14F yield of 6.1%). Upgrade to Neutral.

Source/Extract/Excerpts/来源/转贴/摘录: Nomura-Research,
Publish date: 02/10/13

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