RHB Bank Singapore analyst Vijay Natarajan is keeping his “buy” call on Keppel REIT with an unchanged target price of $1.08.
As at his report dated Jan 31, the REIT is trading at a unit price of 92 cents, which Natarajan believes, is “mispriced”. At its current unit price levels, the REIT is trading at a discount of over 30% to its book value. This is due to investor scepticism towards the office sector, says the analyst.
The REIT’s results for the 2HFY2023 and FY2023 ended Dec 31, 2023, also met Natarajan’s expectations.
On Jan 30, Keppel REIT reported a distribution per unit (DPU) of 5.80 cents for the FY2023 ended Dec 31, 2023, 2.0% lower y-o-y. The REIT’s 2HFY2023 DPU fell by 1.7% y-o-y to 2.90 cents due to higher borrowing costs which offset the “healthy” 7% net property income (NPI) growth from operational improvements.
The REIT’s operational performance also remains robust with improvements in occupancy as well as healthy positive rental reversions. These are expected to remain strong in 2024, says Natarajan. The REIT’s property in Japan, KR Ginza II, in particular, achieved full occupancy, which broadly outperformed the analyst’s expectations.
While borrowing costs should increase in FY2024, this is likely to be mitigated by organic income growth and contributions from the REIT’s new developments, the analyst notes.
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After adjusting his occupancy and interest cost estimates, Natarajan has lowered by FY2024 DPU expectations by 1% and increased his FY2025 DPU forecast by 1%. His estimates have also been rolled forward by a year.
His target price includes an environmental, social and governance (ESG) premium of 2% as the REIT’s ESG score of 3.2 is above the country median.
Maybank Securities analyst Krishna Guha also kept his "buy" call and target price of $1 even though Keppel REIT's FY2023 stood 2% below his estimates as well as that of the consensus.
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The REIT's organic growth, reflecting resilient operations, was offset by higher borrowing costs.
"While transitional vacancy may creep up, lowering distribution from operations, top-ups will mitigate the impact," says Guha in his Feb 1 report.
However, he has lowered his DPU estimates by 2% to 4% after factoring in a potentially lower occupancy as well as effective rents and higher borrowing costs.
"The REIT offers exposure to high grade central business district (CBD) offices at 6.3% yield and 30% discount to book, pricing it at lower end of historical ranges," he says.
Units in Keppel REIT closed 1 cent higher or 1.09% up at 92.5 cents on Jan 31.
