Brokers&rsquo take: Analysts unshaken by Keppel Reit&rsquo s lower 9-month distribution

 

BROKERAGES covering Keppel Reit : K71U -0.6% remain largely positive on its valuations and prospects following the release of its financial updates for the first nine months of the fiscal year.

 

To recap, the Reit reported a 5 per cent rise in nine-month property income &ndash though distributable income from operations fell 10.1 per cent on the year due to higher borrowing costs, property tax and utility costs.

 

Maybank Securities on Wednesday (Oct 18) consequently lowered its price target on the real estate investment trust (Reit) to S$1 from S$1.05 to factor in a higher risk-free rate and lower margins, which led to a 1 per cent decline in the research house&rsquo s distribution per unit estimates.

 

It, however, maintained its &ldquo buy&rdquo call as Maybank analyst Krishna Guha continues to like the Reit for its &ldquo stable distribution and reasonable valuation relative to its own history and peer commercial Reits&rdquo .

 

DBS Group Research, CGS-CIMB and RHB Research also reiterated their bullish ratings on Keppel Reit with their price targets unchanged at S$1.15, S$1.14 and S$1.08, respectively.

 

Though DBS expects Keppel Reit&rsquo s unit price could be &ldquo weighed down by a cautious stance on the continuation of rising interest rates&rdquo in the near term, the research house believes current unit price levels present an attractive entry point in the medium term. 

 

Current unit price levels also position the Reit for a turn in the interest rate cycle, in DBS&rsquo view, as it continues to rate the Reit at &ldquo buy&rdquo .

 

As CGS-CIMB projects Keppel Reit to turn in a 7.1 per cent dividend yield for FY2023, the research house believes much of the downside risk has been priced in.

 

The lower 9M distribution figures came in broadly in line with expectations, said its analysts, who maintained their &ldquo add&rdquo call while highlighting the Reit&rsquo s improving Q3 portfolio occupancy amid positive rental reversions.

 

On the other hand, RHB&rsquo s Vijay Natarajan said he was &ldquo positively surprised&rdquo by the higher occupancy figures across most of Keppel Reit&rsquo s overseas assets with stronger rental reversions in the latest Q3 period.

 

&ldquo Keppel Reit is oversold, in our view, amid broader market pessimism on the office asset class. It is trading at an attractive 40 per cent discount to book value with 7 per cent yield,&rdquo said the analyst as he remained &ldquo buy&rdquo on the Reit.

 

Despite acknowledging &ldquo attractive&rdquo consensus estimates for Keppel Reit, Lim & Tan Securities maintained its &ldquo hold&rdquo recommendation on the counter with an unchanged S$0.84 price target.

 

&ldquo While upside to consensus target price (S$0.99) of 18 per cent, dividend yield of 6 per cent to 7 per cent and price-to-book of 0.6 times seems attractive, the headwinds from higher-for-longer rates, coupled with inflationary cost pressures and limited upside to rents would likely limit upside potential for now,&rdquo commented the research house.